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dominover
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domonic

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thomson

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dominover started following Options Pricing and Options Trading, Institutional Trading Techniques, Books Covering Volatility Surface and and 1 other

At least I know how mitsubishi feels now.. This still doesn't answer the question.

I have always wondered about something.... What methods do institutional traders (from Investment Banks or Hedge Funds) to trade stocks? I always thought they would have to justify their choices of trades by tying each trade back to some solid science. I can't imagine they would say that they saw the 'head and shoulders' pattern and bought on that basis. Do they use Charting. If so, do they do this by looking at charting patterns or other acceptable techniques? Also.. Do they only follow the day to day news and react like everyone else? I'm curious as to what is considered an acceptable method used in trading in reputable institutions? Is there any book recommendations which walk you through how institutions go about this kind of thing? Thanks

Hi I'm wondering if anyone could refer me to a good book on Volatility Surface or a book which covers this topic well. I know there is a book called "The Volatility Surface" though I thought there would be others here who have read other books on this topic which they thought covered this well. Thanks

As an input to calculating option prices one of the inputs is the underlying stock's historical volatility. What time frame do you use for this calculation of historical volatility? (how many days)? Thanks

I'm just pondering ideas here. Just a discussion and I'm not disagreeing with what you are saying. The reason I make the assumption that implied volatility may provide something of a proxy for the sentiment in the underlying (say equity) markets is that there would be a reason for the predicted volume surrounding turning points in the market. If value does in fact have some impact on turning points in the market for options and shares then I would logically assume that implied volatility (forward looking) would could provide some insight into turning points. I don't know this from experience of course, it's just ranking the logic in my mind. So if implied volatility does not indicate which direction the market is heading or is perceived to be heading by a certain date then I make another assumption. That is, if the underlying market is expecting to climb the why not buy the underlying instead of a call option to benefit from that price rise. Benefiting from a price rise would in fact be lower risk if you bought the underlying instead of the option because a fall in price does not necessarily mean everything is lost. But then again, i have no doubt the leverage gained from buying calls and then selling them when they are well in the money would be more profitable. There's just more risk. Compared to the option, if the price dies not rise before expiration then the contract price is lost. Thus.. from this.. I would make the assumption that future implied volatility could be a gauge of predictions of future put option activity. Therefore, if put option activity is predicting in a bull market the it could possibly be an indication of a turning point in the market from bull to bear. As I said, this is just a discussion and I'm not disagreeing with your explanation. I just like to ponder these things because if I was the market I know what would make me buy or sell options or shares and thus, billions of me might do the same I think an important point to consider is that options have a time constraint whereas the underlying does not necessarily. Concentrated activity in options I would probably make the assumption that this activity is for a reason. A bullish trader who buys puts may do so for a certain period because by that puts expiration, he may expect it to move further into the money and thus trade it or exercise it. :missy: Maybe, maybe not? I don't necessarily believe any one thing but I like to discuss these things so I can rule them out .. Thanks for the replies.. Please respond if you can make sense of my post.

Good explanation. Thanks. I'm aware of implied volatility and the importance of it. I've heard this before, that option pricing models are limited in value. I don't trade options myself by I make the below assumptions. If I am not using an option pricing model, an awareness of the equity market s(for equity options) combined with implied volatility are presumably the best tools for determining where value is in options I would also assume that this can work the other way. Implied volatility may give some strength to market sentiment for a given underlying and can therefore be used as an indicator for possible price moves in the equity market. Are my assumptions correct? Thanks

Name one Option Pricing Model in Excel?

Ok, thanks. I suppose my next question is then, if I, as a home investor, wanted to price option series then is all that data available to me. I understand underlying historical share prices (which isn't too hard to get) is important. Do investors generally price options and if so how do they go about it. I do understand how to apply Black Scholes to determining option prices as I have studies this area and have applied it in the past. I suppose, I'm trying to get a sense of the reality out there regarding how home investors go about option pricing. My guess is that they generally don't price them but instead apply equity market logic to determining value. If I was to take this on as a project.. maybe write some computer programmed models for option prices to speed the process up a little, then my main concern would be data. Maybe I should ask whether there are data providers who provide a full set of outputs specifically for this purpose. I find equity options very interesting and may soon work on a few things to assist me in the process of trading these.

Hi. Thanks for that. I was starting to wonder if there was anyone out there. I'm a little confused as to what you mean by relative trades? Are you referring to the market price of the option as opposed to the calculated price using a model? Or, are you referring to different option series (relative to each other). Not sure how that applies though.

Maybe someone out there uses this method when trading derivatives. Do you use Black Scholes or Binary models? Does anyone use this system?

I'll answer my own question. Found this snippet on the web. I understand now. Option traders generally rely on the Black Scholes formula to buy options that are priced under the Black Scholes formula calculated value, and sell options that are priced higher than the Black Scholes calculated value. This type of arbitrage trading quickly pushes option prices back towards the Black Scholes Model's calculated value. The Model generally works, but there are a few key instances where the Black Scholes model fails.

Hi I suppose this could relate to all derivatives but I'm particularly interested in equity options. Can someone answer this question. I have always been baffled as to why one would price derivatives using binomial or Black Scholes models for derivative pricing. I am assuming it is so one can work out the price of the option and only trade that option when the market price (separate from the calculated price using Black Scholes or whatever) falls below the calculated price using a derivatives pricing model? Is this a correct assumption or am I completely on the wrong track? Thanks