How to tackle the liquidity problems of option trading

[NettAssets]

Actually I just dropped the projected dividend adjustment for 31st aug out of my calculator and I got the same answer as ASX so I guess they don't allow for dividends until they are announced, but the MM's sure don't let you forget them.
Regards
John

Just had a look at the ASX calculator and it gives the same theoretical value as my software but gives a margin price 14c higher ?
I really need to do some more homework on this.
John

 

[Magdoran]

I am using black scholes models. Binomial model will reach the same value if time intervals are frequent enough.

Really? - not what I've found. They do equate sometimes, but sometimes they don't - depends what you're doing, and how you trade. I usually use binomial over B&S... I also configure the model to suit the market and strategy I'm trading... but horses for courses...

 

[NettAssets]

Hi All

Can someone help me out with the difference between the theoretical price and the option value in the ASX model.

John

 

[wayneL]

Hi All

Can someone help me out with the difference between the theoretical price and the option value in the ASX model.

John

Guessing.......................

The theoretical price uses Statistical Vol? Rather than actual tradeable values?

 

[dutchie]

Not sure but I think that its the last price that option traded for.

Cheers

Dutchie

 

[Nick Radge]

My software worked out a theoretical price for STOQ6 tonight of 1.18 and ASX gave 1.31

One way to determine the positions of the market makers is to see which way they settle an option. Markets makers are given teh right to settle the options series each evening. If you believe your theoretical price is correct and then it settles away from that then you know which way the market makers are skewing. In the example above they are clearly long the STOQ6 or the underlying or they are long vol. Either way they will skew in their favour.

This gets done around the world regardless of what is traded. I remember we used to have hell batlles with settlement prices back on the SFE floor. Prices would be 1 bid at 2 all day only to settle at 3. Being on the offer at 2 all day and not getting filled, just to see it settle at 3 was a major frustration.

 

[sails]

Hi All

Can someone help me out with the difference between the theoretical price and the option value in the ASX model.

John

If you scroll down a bit further on that calculator page of ASX, it gives an explanation of each field. Below are the two you have questioned:

Option Value - from the ASX database (delayed by a minimum of 20 minutes). This is the last price at which the option traded. Note that where the option series has not traded today, but bids and offers are in the market, this price will be the mid point of the bid and ask. Or if there is no bid and ask prices, it will reflect the theoretical value at yesterday ´s close.

Theoretical Price - the theoretical value of the option calculated using inputs as displayed on this page. Find out more about option models.

If live prices differ from theoretical prices it is usually caused by intra-day fluctuations of IV - supply and demand. Just my

Does this help?

 

[sails]

One way to determine the positions of the market makers is to see which way they settle an option. Markets makers are given teh right to settle the options series each evening. If you believe your theoretical price is correct and then it settles away from that then you know which way the market makers are skewing. In the example above they are clearly long the STOQ6 or the underlying or they are long vol. Either way they will skew in their favour.

This gets done around the world regardless of what is traded. I remember we used to have hell batlles with settlement prices back on the SFE floor. Prices would be 1 bid at 2 all day only to settle at 3. Being on the offer at 2 all day and not getting filled, just to see it settle at 3 was a major frustration.

Thanks Nick, that is interesting info which raises a couple of questions:
When you say "each evening" does that mean at the close of option trading - or is it a later time?
Do the ASX then use this settlement price to override their "Option Value" field (as per the ASX definition posted to NettAssets)?

I have also found it is easier to get filled closer to the mid price if there is a tight spread between the bid and ask of the underlying which makes sense so the MM's can hedge and lock in their profit.

 

[flyhigher]

hi, Market maker dissappered for OTM WPL PUT OPTION Aagain.