Reverse Pricing Formula

Me: See pricing formula at IVolatility

rmorse: Go to a website that Calculates option value

Me: see Options Toolbox offered by the CBOE.

NYSEguy: Thinkorswim.com's trading software provides past closing prices for options.

Martinghoul: see espenhaug.com/black_scholes.html

Jerkstore: Find an options calculator, enter the option you want to evaluate, then change the days to expiration. It's very simple.


1/2 a dozen similar answers and you're wondering what my problem is??? LOLOL

 

Insight is either developed on one's own (which requires time and deeper knowledge), or shared by someone who already has it and helps one gain it. Insights are rarely written in books, but even if they were, casual readers may not grasp/notice them.

It is not easy for a person to know what that person does not know that it does not know.

 

Thank-you tradingjournals. You decribe me perfectly.

Everyone else, thanks also, I've been trying to figure out the things mentioned but like Jerkstore said, " don't know enough yet to ask the right questions".

If I buy a $400 call when AAPL is at $400 and I expect to hold it 1-week, then at any time, I can calculate $AAPL - $400 = intrinsic Profit/Loss. It makes sense to me - I know what to expect. But, when it comes to Time Value, whether, Black Scholes, the greeks, online calculators, etc. - it's all the same math, just rearranged algebraically - and, it's all analysis paralysis. None of it explains real-world Time Value in any meaningful dissected way.

 

Really?

Dude, he wasnt being a jerk. You are speaking your own language. Your #'s 4 and 5 dont make any sense to the rest of us.

It's clear you are confused, but you aren't communicating well enough for us to know how or why.

I suggest you don't trade. BUT, if you do, please trade in the VIX or SPX options products. Someone will separate you from your bankroll. It might as well be me

Anyways, let me try to clarify a bit. I ran my old company's education department...I'm a sucker for a blank slate.

I think breaking extrinsic value into little pieces is confusing you. Rather than trying to define extrinsic value as "demand" and "per diem rent" (hard to tell specifics from your posts, but your logic is flawed there), think of implied vol as your demand measuring stick. As there is more demand for an option it's implied vol will rise, and vice versa. Historical vol is probably the most important consideration in estimating IV, but is FAR from the whole formula. Remember that IV is an estimation of future vol rather than a recreation of HV. You could use a historical vol to determine a VERY rough estimate for an IV. Then compare IV to HV to roughly determine if "demand", and thus the option's price, is high or low-- but i can guarantee you won't make money in the long run doing this.

I have no idea what you mean by economic value, but "per diem rent", or theta, is a mathematically necessary by-product of extrinsic value. All extrinsic value will go to zero by expiration.

You are probably taking directional shots, in which case I'd suggest drawing out your p/l charts and forgetting about IV. Focus on time to expiration, your profit/loss break even points, and max potential gain/loss.

"But, when it comes to Time Value, whether, Black Scholes, the greeks, online calculators, etc. - it's all the same math, just rearranged algebraically - and, it's all analysis paralysis. None of it explains real-world Time Value in any meaningful dissected way."

The problem is you keep trying to "dissect" time value into categories that don't make logical sense.

 

Very, very, very, very helpful.
Thanks.

"think of implied vol as your demand measuring stick"
That's what I was thinking, and the comparison with HV is also.
And, yes, "taking directional shots" is my focus, so I'll wrap my head around Theta then.

Once again thanks.

 

Let's see if I can take a stab at this w/o riling you some more

There are multiple variables used in determining an option's price and since several are moving in either driection, a simple once size fits all answer doesn't exist.

Some of the variables can be eliminatated or ignored. Interest rates are a minor determinant since their day to day change has an infintessimal effect. Dividends are a PITA but assume none or the UL nowhere near ex-div so they can be ignored.

Price is simple. If AAPL moves above $400, every dollar above $400 is intrinsic value (stock price minus strike price). The options' price less the intrinsic value is the extrinsic value or time premium. It's that simple.

Or is it?

Each day there's time decay (theta). So while AAPL's price is rising, the extrinsic value is decreasing as time elapes.

In addition, because delta is less than 1.00, for every dollar that AAPL rises, the total premium rises by less than a dollar. That means that as intrinic value is rising, extrinsic value is decreasing.

For example (made up numbers), AAPL is $400, the Nov 400c is $30 with a delta of .55 (no intrinsic value, $30 of TP)

If AAPL immediately rises $1 (no time decay), the call will be worth approx $30.55 and that means that now there's a $1 of intrinsic value and only $29.55 of TP

The real wild card is implied volatility. The preceding example assumes it was unchanged, As Jerkstore mentioned, mplied vol is demand. As demand increases, IV rises and therefore time premium expands (increases). If IV drops, premium drops. One can assess various outcomes at different volatilities but there's no way to know what it will be at some future point in time. Again, it's the wild card.

Since all variables are accounted for in a pricing formula, premium can be easily calculated despite the aforementioned movement of multiple variables because it's snapshot of all at one moment in time. That's your "Real world time value".

Now if we go back to your original post, at any time one can use a pricing formula and calculate what an option's price "was" X-number of days ago. Well, sort of. IV fluctuates intraday and day to day. If you don't know what the IV was "X" days ago, you can only assume that it was then what it is now. The calculation will most likely be in the ball park but there's no guarantee of that since it's an assumption.

If you had the price of another of AAPL's options at that moment in time "X" days ago, you could determine its IV and use that for your option's IV but that assumption has numerous ways to be just as inaccurate.

I don't know how much of this makes sense to you or if it applies to what your asking but that's part of the view from this side of the fence where the same language is used

 

Thank you too now very, very much now.

For me, I think you said it all with IV being the "wild card".
It is what I was thinking, but uncertian since everyone was pointing me to calculators. So, a true Reverse Price Formula for me is going to have to be a chart, oh well.

Once again thanks, and sorry to have been so confused.
I'm less confused now