option pricing question

Discussion in 'Options' started by h hubbins, May 2, 2008.

  1. with the s&p trading @ 1400 earlier this week the dec 1375 calls (25 pts in the money) were bid, offered and settled several points higher tahn the 1425 put (25 pts in the money).

    what caused the difference in price since both were in the money by the same amount?
  2. You may have been looking at "last traded" prices and not settlement prices.
  3. ggoyal


    maybe the puts were farther away than dec since you did not mention which month the puts are. and besides, calls are priced a little more than the puts anyway.
  4. both are dec and i had a quote window open that showed bid/offer.

    april 28th- sp cash 1396.37 settle. dec futures 1402 settle

    1425 put- 98.70 settle
    1375 call- 104.30 settle
    difference 5.6 but calls on ly have $2 more intrinsic value

    the difference b/w cash and futures take dividends into account so i can't attribute it to dividends
  5. The people on the settlement committee may have been "playing games" with the settlements, i.e. they were discounting the strike prices they had sold-short and marked-up the strike prices they were "long".
  6. The cost to carry is different in calls vs puts and the volatility skew in out of the money downside options vs out of the money up side options is HUGE in the SPX. Thats the real answer.
  7. Pita


    when the market is in an up swing/trend calls are higher priced than puts and vice versa.

  8. market swings have nothing to do with the pricing. If that were the case there would be HUGE arbitrage opportunities.

    The only reason why the put 25 points below the at and the call 25 points above the at trade at different prices is becasue of the cost to carry a put vs a call and the volatility skew
  9. Pita


    if you think that market swings have no impact on call and put pricing thats fine for me. I know that they do.

  10. Price swings in the underlying have an effect on the implied volatility which in turn effects the price of the options. That implied volatility effects the options prices on a curve. In a vacuum that curve would be bell shaped with the at the money being at the peak. Since implied volatility rises as the market falls and vice versa there is a skew such that the out of the money downside strikes trade at higher volatilities then the out of the money upside strikes. ALL CALLS AND PUTS IN THE SAME STRIKE SAME MONTH TRADE AT PARITY TO EACHOTHER AND ARE PRICED THE SAME IN RELATIVE TERMS.

    You may believe anything you like. The correct answer I gave is not an opinion its a fact backed up by every single options pricing model known.
    #10     May 2, 2008