# Option Pricing - ACH margin prices 'Fair Value'??



## RichKid (30 March 2006)

I was just checking some option prices with a view to finding some cheap calls. On the ASX site (see options prices) they have a value known as *'Margin Price'*, explained as follows:

_The theoretical fair value of the option calculated by the Australian Clearing House (ACH) which is used to calculate the value of any margin obligations._

I've comapred two lots of prices, one for BHP, which is a bit volatile, and another for OST, which appears to have lower volatility atm.

I note the OST call ACH values are above the 'market value' (or average of last spread) but the BHP calls are below the ACH value, does volatility account for this? ie OST are cheap because they are below fair value (as calcualted by the ACH). I would assume the ACH would charge more for more volatile stocks/options as it would mean greater risk for their loan.

Eg's from ASX eod today:

Code   ExpDate   P/C  Ex    Bid Offer Last Vol OpenInt   MarginPrice 
BHPKE   30/03/06  C  19.000   8.580  8.580  0.000      20            7.905 
BHPKO   30/03/06  C  21.500   6.100  6.100  6.120     51  253       5.420 

OST76   29/06/06  C  3.500   0.535  0.535  0.000    205              0.585 
OST8T   28/09/06  C  3.750   0.440  0.440  0.000    25               0.480 

(I'll try to post some data from intra day trades to check if they are different, I wonder if the ACH price is only updated eod and hence may not change quickly enough to be a good guide in real time).

I'm trying to use the ACH prices as a guide to know when the options are overvalued since some of the free options calculators give values way beyond the market prices. Wayne and others have often mentioned how illiquid the local markets are and how expensive options can be here. My focus is on a more realistic guide, thought the ACH values would be a good reference, does someone know how accurate and fair their valuation model is??

Maybe the concept of an ACH fair value is different to the normal options fair value models we know of???

Any help would be appreciated.


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## sails (30 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*



			
				RichKid said:
			
		

> [...] I'm trying to use the ACH prices as a guide to know when the options are overvalued since some of the free options calculators give values way beyond the market prices. Wayne and others have often mentioned how illiquid the local markets are and how expensive options can be here. My focus is on a more realistic guide, thought the ACH values would be a good reference, does someone know how accurate and fair their valuation model is??
> 
> Maybe the concept of an ACH fair value is different to the normal options fair value models we know of???
> 
> Any help would be appreciated.



Richkid, I don't use the ACH prices, so really don't know, but I would've thought they would get it right.  A major unknown affecting option pricing is IV - so perhaps the ACH just use their IV for the week as stated in their "notices" section as opposed to calculating it each day as some data suppliers do.  The link I just pasted into the post to crackaton for "General Notices" will take you to the "Margin Intervals, Market Maker Obligations, Volatility and Dividend Parameters and Interest Rates" PDF file and there is one for each week.  Also, real time IV does fluctuate even throughout the course of the day especially if there are some fast moves of the underlying.

The other thing to look at is that the ACH would be calculating their fair value on closing prices of the underlying which doesn't happen until 4.15pm.  Although the options market remains open for trading until 4.25, market maker obligations don't apply from 4.00 - 4.25pm, so pricing may not exactly fit into pricing models!

Last thing is to see when the last option trade qctually happened (can be found on "course of sales" - Iress has it).  IOW - what was the underlying trading at when the last option trade went through.  If the closing auction moved price considerably since that last option trade, the option pricing would be different.

Not easy to try and explain, but hopefully will give you some things to look at when you can start comparing actual prices.

I find Hoadley's calculator prices are very close to the live market provided I have all the correct imputs!

Hope this helps!


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## sails (30 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*

Quick as a blink and crackaton's post and my reply are moved  while I'm still typing a reply - now that's efficient moderating  

Here is the new thread which Richkid has made and has the links I mentioned 
https://www.aussiestockforums.com/forums/showthread.php?t=3028


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## RichKid (31 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*



			
				sails said:
			
		

> Richkid, I don't use the ACH prices, so really don't know, but I would've thought they would get it right.  -------
> --------
> -------
> I find Hoadley's calculator prices are very close to the live market provided I have all the correct imputs!
> ...




Hi Sails,

Thanks very much for the reply, I guessed a few of those variables and what you say makes sense, so the ACH price would be a rough guide. Thanks for the tips.

Only issue with the Hoadley calculator is that if we keep changing inputs to match the market maker price then the mm would be dictating the outcome. If we want 'fair' value then it must be independant so that we can see if the mm is 'overcharging'. It becomes a chicken and egg situation otherwise. All depends on getting correct IV, HV etc and other inputs I guess and then waiting til the mm brings the spread down to match.

I might read some of the other options threads too as I recall Wayne and you and a few others have done some quick calcs to determine fair value. If the ACH values match those independent fair value calculations then it would be a good guide imo. But I'll note the time lag as they don't update live as you mention.

thanks again!
Rich
PS Funny how we were posting and editing threads at the same time, happened on another thread too, I try to do it asap, glad it didn't lead to too much confusion!


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## wayneL (31 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*

Hi Rich,

Sans a concrete definition, and real time calculation of the fair values on the ASX site, I wouldn't put too much stock into them. They are essentially meaningless IMNSHO.

I think it's handy to be able to chart SV & IV values like I've posted at various places... this will give a better idea of the relative "expensiveness" of an option.

For instance, at any particular point in time, IV may be less than SV. In the context of a singal day, this would make the option appear cheap. However, in the context of the overall history of IV levels, it may be at an extremely high point, relative to what is normal.

This means that the option which may initially appear cheap, is actually, possibly very expensive. If IV reverts to normal levels, you will lose extrinsic value *before* theta, movement of underlying etc is even considered.

In the US, this information is obtainable free. Here it costs a few $ to set up. But it is essential I believe.

Cheers


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## sails (31 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*



			
				RichKid said:
			
		

> [...] Only issue with the Hoadley calculator is that if we keep changing inputs to match the market maker price then the mm would be dictating the outcome. If we want 'fair' value then it must be independant so that we can see if the mm is 'overcharging'. It becomes a chicken and egg situation otherwise. All depends on getting correct IV, HV etc and other inputs I guess and then waiting til the mm brings the spread down to match.[...]



IV lets us know if the MM is "overcharging", and if so, we may have to use a different option strategy rather than just being long straight puts or calls.  Unfortunately the MM's do dictate and are not very negotiable    - but that is what I like about options as opposed to warrants as we can superimpose other strategies to at least hedge or even profit from the MM's increase in IV. 



> PS Funny how we were posting and editing threads at the same time, happened on another thread too, I try to do it asap, glad it didn't lead to too much confusion



Yes, I was surprised by it - thought I had somehow managed to delete some posts


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## RichKid (31 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*

Wayne/Sails,

Thanks very much for the help. I don't actively trade derivatives but have found that studying the price and volatility behaviour has really helped my trading. 

Thanks to these threads and some books on volatility I now seek out calls when IV is historically low, if at all possible. I'm just trying to squeeze out an even cheaper price on the day if recent volatility has been low.

Thanks for showing the charts of IV and HV Wayne, both here and on your options site, they have helped immensely. I find it annoying that I don't have access to volatility data via comsec, maybe after the changes to the retail trading markets (eg CFD's via comsec, ASX/SFE merger etc) we'll see that data being made available freely. Thanks to Sails I can now plot IV via WebIress (MorrisonSecurities) for nix. I used to use bollinger bands only before that to gauge changes in volatility so that I could better time my entries in the short term. 

All the help is much appreciated, I'll keep reading. I think patience is the key here, just waiting for the right price and strategy without jumping in. Especially for beginners like me.

All the best!


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## money tree (31 March 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*

ACH prices are extremely accurate.

The ASX website using previous days close figures for their calcs. So for EOD, its good......otherwise completely useless.


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## RichKid (1 April 2006)

*Re: Option Pricing- ACH margin prices 'Fair Value'??*



			
				money tree said:
			
		

> ACH prices are extremely accurate.
> 
> The ASX website using previous days close figures for their calcs. So for EOD, its good......otherwise completely useless.




Thanks Money,

I'll compare all prices to see how they relate to each other.

Haven't seen you around these forums much lately, you must be busy around ex-dividend time, lots of activity!?

Rich


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