Help with SIG Interview Question about Options

IMO ..... You also have to take into account a guaranteed payout of $1.00 - that would lower the bid.

 

The 1.00 payout is already accounted for in the calculation:
prob of payout is 1/6 expected payout is 1.00
1/6 * 1.00

 

I'd say my intuitive answer is that fair value is $4.25 for the pay up front for the second throw option. Feels too easy so maybe 80% chance of being correct.

 

Yup. That's the answer.

 

I'd wait for somebody else to make a market then I'll bid under the bid/offer spread, I'm too uneducated to figure this out,but 16 years of trading options has taught me NEVER to make a market

 

I would never play the game of single roll using long term probabilities. I would only offer $1 which no one would take. I dislike gambling.

 

The question isn't about personal preferences. It doesn't matter if you don't believe in market making or if you can only see this as a one time roll.

Expressing personal preferences as an answer poorly hides your inability to even try to think through the problem.

 

garachen didn't think through the "problem" - he took the easy way out and Googled It

 

I doubt that. It was the fundamental question same question as the OPs.

 

MINE. LOL, gambling? It's as close as free money as it gets to buy for less than 3.5