Options Pricing & Technical Analysis

Discussion in 'Options' started by Tahoe_Brent, Mar 3, 2013.

  1. Anyone have any insight about "skew" mentioned in this week's "Striking Price" column in Barron?
    The author states that "skew measures the difference between the IV of puts and calls above/below a stock's price."
    I'd think overlaying this distribution on an underlying's chart would be helpful, as it would display the expected range of the underlying for any periodicity . . of course, updating it in real-time with the same frequency as the underlying.

    Another question about options pricing theory and technical analysis, is if options pricing methodology assumes random distributions to calculate IV, how does pattern recognition, which underlies technical analysis fit in? Since trillions of dollars in options trade every year, isn't there something to it? If so, why don't options market makers use technical analysis to help price options?

    Thanks in advance,

  2. because options market makers don't expose themselves to price risk...

    the market determines the IV ... supply and demand...
  3. http://en.wikipedia.org/wiki/Volatility_smile
  4. Smile exists. Practically it doesn't mean much for a directional trader.

    Re technical analysis: options pricing is based on synthetic creation. Idea is that I sell a call option to you because you think technicals align. You overly and I replicate the option through hedging or synthetic recreation. I make easy money and maybe you are right or wrong.

    Of course reality is different.