Just a general question for the ETO pricing boffins out there, how many models are there for pricing the theoretical value of options? I though that the Black-Scholes (apologies for spelling) method was standard, however when looking at MAP52 today, as with thinly traded options, a theoretical value of 10c was placed in both the bid & ask. Using the calculator from Commsec Protrader, I get a value of 8.8c (using standard interest rate 5.5% & supplied volitilty)
No divvies are due prior to the August series, just wondering if anyone else knew a reason for these anomolies or knew what is bound to be a sensible, straightforward answer?
RichKid
12th-July-2005, 06:42 PM
Howdy,
Just a general question for the ETO pricing boffins out there, how many models are there for pricing the theoretical value of options? I though that the Black-Scholes (apologies for spelling) method was standard, however when looking at MAP52 today, as with thinly traded options, a theoretical value of 10c was placed in both the bid & ask. Using the calculator from Commsec Protrader, I get a value of 8.8c (using standard interest rate 5.5% & supplied volitilty)
No divvies are due prior to the August series, just wondering if anyone else knew a reason for these anomolies or knew what is bound to be a sensible, straightforward answer?
Hi Mofra,
I've had similar problems, thanks to Wayne & Synapse some of those have been sorted out, see this thread for starters: http://www.aussiestockforums.com/forums/showthread.php?t=1593
and see Wayne's excellent stuff here:
http://www.aussiestockforums.com/forums/showthread.php?t=1366&page=1&pp=10
I guess the bottom line is that the calculators can only estimate the price using volatility and the other variables required for the calculations, so put in the wrong stuff and get the wrong result, a lot of the numbers are estimates (eg historical volatility etc). I think Wayne refers to that issue in the threads above.
Not sure how to answer your post since I'm basically still figuring it all out. I thought at first that the calculators were like gospel but they are just a tool to help out imo so it may not be the most important thing- Wayne said he sometimes just glances at the theoretical prices so maybe the 'fair' value isn't that important? Let me know how you go with it and if you figure it out. One thing I do like is to find options with plenty of liquidity (high open interest). If you have graphs and figures illustrating your problem I suppose it'll help clarify the issue for those reading.
Good luck!
Mofra
12th-July-2005, 07:29 PM
Thanks for reply Richkid -
I can replicate the Theoretical prices, mainly by increasing the volitility otherwise calculated from the standard movement of the underlying security - this is generally a few % higher than standard volitility calculations but perhaps brokers are adding in an "MM greed quotient" that is not found in standard calculators (hey they're not a community service! :p: )
RichKid
12th-July-2005, 07:36 PM
Thanks for reply Richkid -
I can replicate the Theoretical prices, mainly by increasing the volitility otherwise calculated from the standard movement of the underlying security - this is generally a few % higher than standard volitility calculations but perhaps brokers are adding in an "MM greed quotient" that is not found in standard calculators (hey they're not a community service! :p: )
Hi Mofra,
That appears to be a valid explanation and is consistent with what Wayne & Synapse said. As long as the volatility figures are not manipulated unfairly by the mm's then we can at least estimate a pay-off diagramme scenario.
Try the free Hoadley options calculator, a bit annoying to use the free version as you need to enter data manually but it calculates option's volatility automatically if you put the market price in (ie use the average of the spread as the market price).
