How are options actually priced?

Discussion in 'Options' started by IIAce, Oct 7, 2006.

  1. IIAce


    Who comes up with the actual options' prices? Is it the exchange? Supply and demand? A model like Black Scholes?
  2. On "Triple Witching" day, the leaders of the US, Russia, and Burkina Faso gather around a Ouija board and fill in a massive Excel spread sheet.

    "Quadruple Witching" is when they include France.

    It's also possible supply and demand sets all prices in a free market, but I'm more of a conspiracy theorist than that.
    is The Man. They're trying to surpress all such theories by claiming that market participants set a fair value for options by looking at probability-based pricing models such as Black-Scholes.

    Don't bother looking at their free seminars. They'll just fill your head with nonsense.

    My friend knows the head of Burkina Faso. He's going to cut me a break on Nov GOOG 300 puts on October 16th.
  3. Yep, op pricing is a witch's brew...and there are dragons. So beware!

  4. IIAce


    So, and demand is how they're priced I guess?
  5. I think that's correct, but in the sense that traders do make an assumption about the 'value'of an option, thus estimating the current Implied Volatility. If an option's price is out of line it becomes profitable for a trader to take advantage. If it gets 'to expensive' he sells, and reverse. This brings the price back in line.

    When the market gets more agitated there will be more hesitation in estimating the IV and selling an option will be slightly slowed so prices will rise.

    So, it is supply and demand but on a different level than with stock.

  6. wabrew


    Here is a primer on option pricing

    But in the real world computers calculate the bid/ask in a flash. Just go into any broker quote system and ask for The bid/ask on, say October, options on any stock. You will get prices for all the October string instantly. No person could calculate px's this fast
  7. chinsven


    How can I find the futures options price?
    Is it possible to obtain the futures options implied volatility somewhere?
  8. Kap


    :D superb
  9. What is an FOP price?
    #10     Oct 13, 2006