how to adjust for interest rates while market making options on CASH like SPX

Discussion in 'Options' started by tradingbuddha, Aug 10, 2011.

  1. I'm trying to price SPX options that are options on Cash, but would be hedging my trades and position with using S&P futures. Am using Black Scholes model to price options and a wing volatility model to fit implied vols per strike level. How would I adjust for interest rates, keeping in mind my option theoretical value still factors in the cost of carry for option premium but deducts or backs out the cost of carry on the stock as I would be using S&P 500 futures to hedge my trades and position. Am I thinking in the right direction or if anyone could please suggest or recommend any method that would make me have a fairly accurate theoretical value for market making. Thanks in advance.