Where can you get the most reliable IV for pricing options? I compared theo value quotes from Etrade (Reuters feed) and OX. The IV are always slightly different: Etrade being higher and OX being lower. How do you know which one is more accurate if you want to get the pricing right?
There might be a misunderstanding of some concepts or perhaps not. IV will be calculated and driven from market prices. The market prices used may be the bid,ask,last,mid point etc. hence minor variations between brokers. However, from the phrasing, I'm not sure this is the origin of your query. You want to know "how to get the pricing right" by which, do you mean you want to get the dollar price of the option(s) right or the IV "pricing"? Once again, the Implied Volatility is derived from the market prices...so the dollar pricing is already there... If you are referring to calculating theoretical option prices then that requires you estimate a value for volatility to enter into the model which will then output option prices for you. By default, OX uses ATM IV for the default estimate as the input across all strikes (i.e. no skew is modeled) IIRC. The value for volatility that you enter is not dependent on any broker, only you. Perhaps some more clarification is required... MoMoney.
Base on the supply & demand, mm decides the option pricing. Then the imp volatility gets determined from the pricing. I think it is a chicken or egg first question Imp volatily can be used to see what the market expectation of event risk.
because with all inputs being the exact same different variations of the same basic model will give different IV...so I figure E-Trade and the other place maynot be using the same model...very common...
Especially confusing is a "mean" IV calcs. All those different weights given to time to exp , strikes and volume per strike.
ok.here is the thing..it all depends on what model you want to use...fair value or theo value is only the solution to a pricing model arrived at by inputing the known variables..my point being you need to first find a model that fits your perception of what best represents the market you are pricing...some models are different because they don not take all holidays out of their model for days to expiration..some do...this alone can cause large differences in values for option over a year out...so invesigate the designs of the model you are looking at and choose the one that best fits your perception of the market...all of these models make a lot of assumptions about price behavior...it ain't as simple as you want it ot be..if it was no one would make any money so few people would commitg capital do do this play...good luck..
Ok, here's a random question. INTC traded over 11K auggie 17.50 line calls. Most were bot on the offer. I would say the mm needs to hedge these immediately, no? (imagine being short that many calls and bill gates and w. buffet decide to purchase intc at a 50% premium instead of their philanthopy endeavors=) 1. Does the mm immediately buy the 17.5 puts and sell the stock short to complete the reversal? 2. If he buys the calls why wouldn't it show in the volume figures disseminated by the exchanges? Sorry if I'm hijacking the thread.
The fair value of an option is the mid point. In option pricing the biggest smudge factor is the volatility so if you're looking for the EXACT, TRUE, 100% FAIR value then forget about it, it doesn't exist.
The model that you use doesn't really make a whole lot of difference when you don't know what inputs to use, namely VOLATILITY. GARBAGE IN, GARBAGE OUT.