Day Trading & Forex Forum

ali_g12

Does anyone know how IG index price their options? I have been paper trading on Dow Jones options for a while using a black scholes pricing model and have developed a system of trading that I'm confident in. I have found the pricing of IG's options difficult to understand and definitely different from my calculator. After going long on a DEC 11600 call this morning at 235 (market was at 10715 at the time) I now am at 264 with market at 10965. So I made 30 points on a 250 point rally! This gives an average delta of 0.12.

My calculator prices the option price at 332 with delta at 0.37.

I get the feeling that I would have been better off trading the daily dow or futures with small bet sizes and a 400 point stop loss. But I feel a lot safer trading options as although I am usually right I need the leeway of the options to cover any mistimings in my trades.

I think that volatility may be something that I'm factoring wrong - perhaps an options guru would be able to take me through a pricing model that the spread bet companies would be using.

Apart from I would like to know who does the best spreads on Dow options - IG index have a spread of 16.

stevespray

I've no insight into the actual math that each firm use on these. Some might just price off an underlying whilst others may use their own models. Since IG clearly price out of hours I'd guess that they have developed their own models. A 30 point rise in your options value seems about right given that a ) Dec expiry is a long way off, and b )you're still 650 points out of the money.

It sounds to me like you need to check your IV calcs. Using the numbers which you have you should be able to 'tune' your model's IV to mimic IG's prices for the respective levels.

Steve.

ali_g12

Thanks for the reply Steve. I called up the IG options desk today to ask a few questions. They said they used a Black-Scholes model and said that their implied volatility for DEC was 25 and 29 for OCT.

My knowledge is lacking somewhat in the areas of SV and IV so I did some research. I've run some standard deviation calculations in a spreadsheet to get an idea of historical volatility from 50 days of +/- % closings on the DJI. Is 50 day the correct amount of days to be running an a historical volatility calculation for purposes of options pricing? If it is then I've got 50 day SV at 34% - does that sound right?

As far as IV goes am I right in saying that I will just have to use the % difference between IG's market price and the theoretical price from my Black Scholes pricing model? In which case my options model says the 10600 call should be worth 733 (with market at 10350 and SV at 35%). IG have it at 425 at the moment therefore the IV that IG have on this option is 57%? Surely not?

The spread was at 40 earlier today but is at 30 now.

v01101999

the option price by IG tends to tie closely with the listed option market (on CBOE)

ali_g12

I have had a look on CBOE for the DJX options prices but can't find any. Do you have a link to the prices? How would a DEC11600 call be expressed as a DJX symbol?