Beware! Buggy Options Calculator by Interactive Brokers
- Thread starter earth_imperator
- Start date
@earth_imperator. - Click bait with the title which you should change as you are wrong and need to get some understanding on options. Black Scholes is more common when teaching options but it uses a log normal distribution which has its flaws. In the real world, binomial or Monte Carlo models are more practical. Cox Ross is binomial which better prices American style options.
BSM is developed with European-style options in mind yes but it can be modified to apply to the American-style options as well by manually changing the time to expiration to reflect an earlier expiration date.
No OP REALLY thinks it's buggy. It's not a clickbait. OP is a Chinese propagandist who is set out to find faults in everything in the western world including our brokerages. LOL
You're welcome, it was a fun question. That said... they show the terms and conditions before you visit the page (and prompt you to agree).
They also mention the fact that... "The calculations obtained from the Software are based on a mathematical model which incorporates a variety of assumptions, some of which may not be applicable in the markets at the time of the calculation, and resulting prices may be different from actual prices or prices calculated by other mathematical models."
You read that stuff, right?I don't think they're trying to mislead anyone.
Finally, when you first visit the calculator, the box for DTE is pre-filled with 365. It's not a stretch to assume they're using 365/yr (even without looking at the source).
All this makes a decent argument that the big problem is "user error". Then again, I'm a software engineer and of course I'm going to say that. But I greatly empathize with end-users so feel free to disagree!
Anyway, engineering is always about making trade-offs and, although helpful, I don't think that little widget is meant to be used for "real trading". BTW, here's an interesting read on the various methods. I don't know that there's a right(tm) one necessarily.
¯\_(ツ)_/¯
Is the OP trying to make IB compensate him for the "buggy" option calculator? LOL First of all, it's provided as a courtesy and not part of their mandatory obligatory service. IB is a brokerage not an option calculation provider meaning that technically their job is just to get your executed and that's it and everything else that they provide is extra. They even have a disclaimer that states to you that they are not even responsible for the accuracy of their trading software. You use it at your own risk.
Now OP is going to become one of those frivolous lawsuit launchers on top of a CCP propagandist. LOL
Log-normal has flaws? Are you saying the others don't use log-normal?
It's the fault of IB b/c they did not document it properly, not even in the fineprint.
And: IMO their calculator is giving a wrong result, b/c BSM is the correct one and theirs diverges about 1% from BSM...
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*get your orders executed* not get your executed
PROOF WHY THE IB OPTION CALCULATOR IS WRONG AND IS BUGGY:I think the following options calculator of the broker Interactive Brokers is BUGGY! :
https://www.interactivebrokers.com/en/trading/options-calculator.php
It seems it works with a different number of days in year than 365 or 365.25 or 366 or 252.
And there is also no documentation about this fact on that page.
Anybody can figure out where the bug lies in that tool? Is it in the definition of year or rather in their implementation of the BSM algorithm?
What a shame for such a finance & brokerage company! It's even a listed publicly traded company... .
The following result is IMO buggy... The correct premium should be 13.892037, not 13.77678.
And the Greeks are wrong as well, caused by the wrong result for the premium :
View attachment 298812
It is said that b/c with American Style options one can exercise anytime (as opposed to the standard European Style where exercise can be done only at expiration), then it has to be more expensive than European Style options. That's their own argumentation!
But take a closer look: this buggy calculator even calculates exactly the opposite! Ie. double-buggy IMO!
"The correct premium should be 13.892037, not 13.77678."
Forget this Cox-Ross-Rubinstein crap pricing method and that IB calculator which uses it!
Here's a better calculator based on Black-Scholes-Merton (BSM):
http://www.option-price.com/index.php
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PROOF WHY THE IB OPTION CALCULATOR IS WRONG AND IS BUGGY:
It is said that b/c with American Style options one can exercise anytime (as opposed to the standard European Style where exercise can be done only at expiration), then it has to be more expensive than European Style options. That's their own argumentation!
But take a closer look: this buggy calculator even calculates exactly the opposite! Ie. double-buggy IMO!
"The correct premium should be 13.892037, not 13.77678."
Forget this Cox-Ross-Rubinstein crap pricing method and that IB calculator which uses it!
Here's a better calculator based on Black-Scholes-Merton (BSM):
http://www.option-price.com/index.php
No wonder the options market makers eat novices like you for lunch. Please stick to your basic B&S and let us know what you'll be trading.