Reverse Pricing Formula

Discussion in 'Options' started by Wait4proof, Sep 15, 2011.

  1. I've read (tried to anyway :confused: ) several articles on wikipedia about option pricing and I want to know how to calculate past time value. Here's what I want to do:

    At any time, take an option and somehow calculate what it's price "was" X-number of days ago.

    Is this possible?

    I already know that the intrinsic value X days ago is the stock price minus the strike, so I assume I want a theta formula of some sort.

    Any help would be great, I just want to say first that if you have a formula could you please write it with general math in mind (+ - * / sqrt). Trying to read wikipedia left me scratching my head.

    Thanks in advance.
     
  2. In order to do that you would have to make an assumption for what the volatility was X days ago. That would give you an answer but it wouldn't necessarily be the correct one for that day.

    Here's a calculator at IVolatility. You might have to sign up (it's free) to see it:

    http://www.ivolatility.com/calc/
     
  3. rmorse

    rmorse ET Sponsor

    Very simple. Go to a website that Calculates option value. Put in today's implied volatility, the option strike and stock price, but instead of using the days to expiration from today, enter the number of days you want to simulate. so, if there are 15 days to expiration now and you want values from 30 days ago, use 45 days. This will make the assumption, implied vol was the same back then, which will never be accurate, but answer your question.
     
  4. Put it on a chart and see what it was.
     
  5. The "it" is it.
    But what is "it"?

    An actual calculation is what I'm hoping for (i.e. excel worksheet).
     
  6. There are calculators and pricing formulas all over the web. Use GOOGLE.

    Another one is the Options Toolbox offered by the CBOE.
     
  7. NYSEguy

    NYSEguy

    Thinkorswim.com lets you can download their trading software for free. Their analysis tools include a feature called "thinkback" that provides past closing prices for options.
     
  8. Many of you have pointed me to Black Scholes and Implied Volitility. Well BS takes me back to wikipedia, ugh. So I decided to re-read some things over the past few days regarding IM, and to me, too many descriptions out there are overly scientific. I want to try to make it simple in my mind, so here's my logic...

    Option Price = Intrinsic Value + Time Value
    Intrinsic Value (a.k.a. Equity) = Underlying Price - Option Strike
    Time Value = Per Diem Rent + Economic Value
    Per Diem Rent = ?(Historical Volitility plugged into BS)
    Economic Value = ?(HV - Implied Volitility, a.k.a. Demand)

    Is this a correct assessment?
    If so, then I think the general formula out there should be:

    Option Price = Equity + Per Diem Rent + Demand

    Well, what do you think?
     
  9. I think you're very confused.
     
    #10     Sep 20, 2011