IG INdex Options pricing

[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?

 

[glasshopper]

I woukdn't go anywhere near ANY of IG Indexes daily options or for that matter, any of their option products. They are all a complete rip off.

ALL OF THEM

including their binaries, ladder, or dailies which they promote very hard and if you trade them you will see why.

The reason, well they have options traders who hve to settle their book at any given moment. Since CBOE don't offer one day options IG index are the counter party and thus have direct exposure to risk. If the market moves against them comapred to what their book looks like, they will deliberatly 'fix' the price of the option so that they are back in the mney themselves.

so if you are trading with them and they are on the other side of a winning bet they will changr the price of the option with no attention to the underlying market even though they are are also the market makers as all of their indexes are not strictly the same. For example, CBOE S&P500 index which has the ticker SPX is called US SPX 500 - not the same thing.

Back to the options. You will be trading the option one minute in the money, the next, someone on their options desk will be in a unprofitable position and mark down the option 20%, 30%, 40% 50%. Anything they feel basically against the market you are trading and due to the decay on this instrument, which is the worst there is of any option trading day, you will likely end up expiring them worthless.

You have been warned

 

[kalott]

Is it possible to sell (write) options with IG?

like covered calls?

 

[tar]

Is it possible to sell (write) options with IG?

like covered calls?

u can sell

 

[hacks]

I woukdn't go anywhere near ANY of IG Indexes daily options or for that matter, any of their option products. They are all a complete rip off.

ALL OF THEM

including their binaries, ladder, or dailies which they promote very hard and if you trade them you will see why.

The reason, well they have options traders who hve to settle their book at any given moment. Since CBOE don't offer one day options IG index are the counter party and thus have direct exposure to risk. If the market moves against them comapred to what their book looks like, they will deliberatly 'fix' the price of the option so that they are back in the mney themselves.

so if you are trading with them and they are on the other side of a winning bet they will changr the price of the option with no attention to the underlying market even though they are are also the market makers as all of their indexes are not strictly the same. For example, CBOE S&P500 index which has the ticker SPX is called US SPX 500 - not the same thing.

Back to the options. You will be trading the option one minute in the money, the next, someone on their options desk will be in a unprofitable position and mark down the option 20%, 30%, 40% 50%. Anything they feel basically against the market you are trading and due to the decay on this instrument, which is the worst there is of any option trading day, you will likely end up expiring them worthless.

You have been warned

I've never had a problem with IG Index trading daily options and I've never been requoted. Sometimes their charts show the wrong strike price, i.e. when you click on FTSE 100 5700 call it comes up with the 5720 call, but apart from that, everything is fine. I don't intend to boast, but one day I made over £500 by buying a FTSE daily call at £2 per point, which settled at the FTSE close. So it is possible to make money trading daily options. It seems difficult at first because you'll need to forecast both price and volatility.

I don't think they can get away with "fixing" the price without the customer noticing. I work out the implied volatility of the option before I enter the trade (long call or long put) using an excel spreadsheet. This can be compared to the implied volatility at the most recent close as published by the exchanges, available free from Euronext LIFFE (for the FTSE).

There are only a few spreadbetting companies that offer option trading (IG Index, City Index/Finspreads and ETX Capital). I've tried Finspreads. They offer £1 per point for the Daily Dow options whereas IG is £2, but spreads are wider than IG's.

 

[glasshopper]

Implied volilitity in this case meant another client placing a rather large bet and skewing their book. How does a customer apply a pricing model against this?