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Fair Value on Vix Options
- Thread starter drenaud
- Start date
You could start with this short video I made on trading VIX futures and options. It's free and I have nothing to sell. http://masteroptions.com/?p=82
If you want to go more in depth about option pricing itself, you can watch the video at http://masteroptions.com/?p=3
If you want to go more in depth about option pricing itself, you can watch the video at http://masteroptions.com/?p=3
Dmo,
Great video. I am still trying to figure out if there are models out there that will calculate a 'fair' price for a particular vix option given the users assumptions about the future.
If you were buying or selling an option on an equity or futures you could input your view of future vol, interest rates etc and come up with a 'fair price.'
If the market prices was significantly different you may chose to buy or sell to take advantage of the pricing differences.
Even if a model doesn't always represent reality it seems like it is a good starting point.
David
Great video. I am still trying to figure out if there are models out there that will calculate a 'fair' price for a particular vix option given the users assumptions about the future.
If you were buying or selling an option on an equity or futures you could input your view of future vol, interest rates etc and come up with a 'fair price.'
If the market prices was significantly different you may chose to buy or sell to take advantage of the pricing differences.
Even if a model doesn't always represent reality it seems like it is a good starting point.
David
Quote from drenaud:
Dmo,
Great video. I am still trying to figure out if there are models out there that will calculate a 'fair' price for a particular vix option given the users assumptions about the future.
If you were buying or selling an option on an equity or futures you could input your view of future vol, interest rates etc and come up with a 'fair price.'
If the market prices was significantly different you may chose to buy or sell to take advantage of the pricing differences.
Even if a model doesn't always represent reality it seems like it is a good starting point.
David
Well, you know what the model's assumptions are. So if you can point to one or more of those assumptions and have a firm conviction they're wrong, then you've decided that the option is either overvalued or undervalued. Once you've decided that, you have a pretty good clue what to do next.
If implied volatility of an option today is 40% and you think that soon it will be 60%, then you've decided that in your opinion the option is underpriced. Or you may be of the opinion that a fundamental assumption on which the model is based is just plain wrong.
A good example is Warren Buffett's sale of billions of dollars worth of puts on the stock market. He looked at a long-term chart of the stock market - which shows a definite steady uptrend over time - and decided the pricing model's assumption of random-walk pricing of the stock market and a lognormal probability distribution are baloney. Based on that, he decided he could sell puts at way over what he considered fair value.