How to determine option price ?

[mdszj]

I sometimes buy or sell options using a conditional order that becomes active
based on the underlying price, for example, buy/sell a SPY call if SPY mark is
at or above/below XX.XX. My broker is thinkorswim. The problem with using a conditional order is that you do not really know what the price of the option will be at your
specified condition. DOes anyone know if there is a way to determine what the
option price would be at a given underlying price? Could one way be to use the
delta value of the option? One problem I see with this is that the delta may
change during the trade.

thx

 

[ERA]

That is one way, not having all the details and without an option model, another way is to watch the relationship between different strike prices ie if SPY is 108 , ATM calls is 3, 109 call is 2.5 and 110 call is 2, a guide would be if the SPY moves to 109 in short order the 109 call will be close to 3. 110 call will be 2.5 etc. If you are dealing with relatively distant options , time decay will be minimal, with options with a a short time till expiry , it would be a significant factor , a bit of interpolation will be required depending on where the corresponding underlying is in relation to the strike price.

 

[Benton D Struckcheon]

I'd have to look, but I'm pretty sure the TOS platform actually tells you this info. I know if you put a limit order out on an options trade it will tell you how much the underlying has to move (theoretically of course) before you get filled. Not sure if it goes the other way around, i.e., if you say you want to get filled when the stock hits x the option will go to y. Something to check...

 

[arabianights]

pricing options is for woofters, everyone knows that you can sell them at any price and make riskless money!

 

[Benton D Struckcheon]

I'd have to look, but I'm pretty sure the TOS platform actually tells you this info. I know if you put a limit order out on an options trade it will tell you how much the underlying has to move (theoretically of course) before you get filled. Not sure if it goes the other way around, i.e., if you say you want to get filled when the stock hits x the option will go to y. Something to check...

Just tried this on TOS, and it doesn't, but what ERA said is good enough if you're doing this on the same day. It's how I do a quick & dirty read on what I can expect if price moves x distance when I'm trading during the day.

 

[mdszj]

Just tried this on TOS, and it doesn't, but what ERA said is good enough if you're doing this on the same day. It's how I do a quick & dirty read on what I can expect if price moves x distance when I'm trading during the day.

Yes that is probably what I will do , thx all for responses.

 

[gooseman]

using delta is fine unless there is a huge vol move.

 

[OptionTimeline]

DOes anyone know if there is a way to determine what the
option price would be at a given underlying price? Could one way be to use the
delta value of the option? One problem I see with this is that the delta may
change during the trade.

thx

You can use the B&S calculator in http://optiontimeline.com/OptList/En/OptList.html -
Click on the "B&S" button on th upper-right.

It can be done on the entire strategy from withing the simulator page.

 

[mdszj]

You can use the B&S calculator in http://optiontimeline.com/OptList/En/OptList.html -
Click on the "B&S" button on th upper-right.

It can be done on the entire strategy from withing the simulator page.

I am looking at the calculator right now, looks like it is based on Black-Scholes model? Can you tell me where i would find the standard deviation, and interest rate? ALso I assume that index value would be the underlying index for the option - so since $SPX is now at 1109.17 I would plug that in?

thx

 

[mdszj]

Forgot to ask - what does the standard deviation represent?

thx

 

[OptionTimeline]

I am looking at the calculator right now, looks like it is based on Black-Scholes model? Can you tell me where i would find the standard deviation, and interest rate? ALso I assume that index value would be the underlying index for the option - so since $SPX is now at 1109.17 I would plug that in?

thx

Yes, the calculator is based on the Black-Scholes model.

The standard deviation represents the volatility of the options. Higher S.D. causes higher price of the options (you can check it in the calculator), as if there is an expectation for a relatively high movement of the underlying asset.

Although the calculator is generic, its values are built to fit certain assets. Since we deal with ETF's here, you can take SPY to represent $SPX. It is now $111.14 and this is the default value you will see.

Since we're just after February expiration the standard deviation is now zero for Feb options. If you change the dropdown value to March you will see values around 15-16 (each option has it's own S.D. value).

Hisorical values of standard deviation actually form the VIX (Volatility Index) chart. You can see it in http://optiontimeline.com/Main/En/IndexVIX.html
By default you'll see the VIX of SPY, and you can change the symbol to check other ETF's.

Regarding interest rates - the default stands on 0.5% and can be changed. Anyway it has only a minor effect on the option prices.


Good luck!

-- optiontimeline

 

[mdszj]

Yes, the calculator is based on the Black-Scholes model.

The standard deviation represents the volatility of the options. Higher S.D. causes higher price of the options (you can check it in the calculator), as if there is an expectation for a relatively high movement of the underlying asset.

Although the calculator is generic, its values are built to fit certain assets. Since we deal with ETF's here, you can take SPY to represent $SPX. It is now $111.14 and this is the default value you will see.

Since we're just after February expiration the standard deviation is now zero for Feb options. If you change the dropdown value to March you will see values around 15-16 (each option has it's own S.D. value).

Hisorical values of standard deviation actually form the VIX (Volatility Index) chart. You can see it in http://optiontimeline.com/Main/En/IndexVIX.html
By default you'll see the VIX of SPY, and you can change the symbol to check other ETF's.

Regarding interest rates - the default stands on 0.5% and can be changed. Anyway it has only a minor effect on the option prices.


Good luck!

-- optiontimeline

So it looks like all I would need to do is first click on the option I have, for example I currently have a SPY Apr 10 109 put, then click the B&S link, then punch in the price of the ETF for which I want the corresponding option price, then hit calculate. Correct?

 

[OptionTimeline]

So it looks like all I would need to do is first click on the option I have, for example I currently have a SPY Apr 10 109 put, then click the B&S link, then punch in the price of the ETF for which I want the corresponding option price, then hit calculate. Correct?

This is basically correct, but...

The big unknown parameter is the standard deviation. When you open the calculator you initially see the current standard deviation of the option, also known as the Implied Volatility, which is the most affecting parameter on the option's market price.
Once the underlying asset changes it usually also changes the standard deviation, and it is sometimes not easy to predict this parameter.

For example if SPY goes down by $2 it will usually increase the S.D. - possibly by 0.5% or 1%, or even by 2%, so the expected price range of the option can be quite large.

An advanced feature exists in the Option Simulator page - http://optiontimeline.com/Stg/En/Stg.html
After building a strategy you can click the B&S button and get the same calculation for the entire strategy. So you can predict the strategy price under certain assumptions in the future, set stoploss if needed, etc.

-- optiontimeline