is there a simple way of figuring out if an option is overpriced or underpriced in IB live? I have heard of the black scholes formula... is there a program that runs side by side with IB that can tell how good of a deal an option is without having to manually calculate the whole formula every price change?
well, with Black sholes. implied versus historical volatility becomes an issue. you can build what you're talking about in excel, but you will still nead to furnish volatility, which is the most elusive of variables. However, Black Scholes is really bullshit (yeah yeah, so they go t a nobel prize...) since it assumes linear volatility. it's an issue. most options way in or out of the money are overpriced (just look at their implied volatility), but I am not selling them because I just don't have the confidence in the calculation.
this is already built in IB. Go to optiontrader, and you can add IV and model (black scholes) fields which show ideal price. You can see if options are over or underpriced according to this.
can you please elaborate on what you mean by this is BS? not that i have all the answers, but wouldn't an assumption of linear volatility be the only way to compare the value of each option? However, Black Scholes is really bullshit (yeah yeah, so they go t a nobel prize...) since it assumes linear volatility. it's an issue. most options way in or out of the money are overpriced (just look at their implied volatility), but I am not selling them because I just don't have the confidence in the calculation. [/B][/QUOTE]
google "volatility smile" or "VOlatility smirk" BS assumes that it doesn't exist. it works ok for realtively near the money options, butthere isn't really tons of free money there.
getting back to the over/under priced question. Those terms are subjective you could make a case for either at anytime in options. If the world thought a particular series was over priced or under priced you can rest assured that it would be corrected pretty quickly in this day and age. NO model is the guaranteed correct value.
If the option is over/under priced do you think you will snap it up fast than the MMâs electronic eye?