How to determine Black-Scholes current Rate number?

[sle]

You don't need to use Black-Scholes for that - just calculate your projected P&L based on greeks.

 

[kapw7]

Start with this formula in your code:
http://en.wikipedia.org/wiki/Black–Scholes#Instruments_paying_continuous_yield_dividends

For example SPY has q=2.03% - http://uk.finance.yahoo.com/q?s=SPY

You can also test using the put-call parity equation.

 

[Option_Attack]

Quote from Look4aSine:

Oh boy, here we go, "overlooked dividends, or not accounting for hard-to-borrows" and again, "combination of dividends, borrow rate and the actual interest rate" - what a nightmare. I'm not sure if I even want to figure out what you both are talking about.

How about this instead:
I want to calculate potential profit, how can I semi-reliably do this using the BS formula?

For instance, can I "assume" these steps will work:
1) Enter the current numbers (stock, strike, exp, IV)
2) Adjust the Rate until I match the current/market Option price
3) Use that Rate for the duration of the option to calculate step 4-6
4) Plug-in a projected Stock price
5) Subtract the number of days I hope that the stock movement to occur in
6) Click "Calculate" to see what the Option price will be at on that day

These are the step I use now, and like I said, it seems like voodoo.

Anyone care to tell me how they personally do it, step by step?
Thanks again for the help and insights.

Maybe you are looking at it wrong. Firstly, I'd just use a fixed rate. Just use LIBOR or treasuries. Next, you don't know what the volatility is until you calc it. With B-S you have to iterate, changing the Vol input until you get the option price being quoted. Then that Vol value is the current IV for that option.

Then use that IV value to calc the option value on the day you are concerned about, and at the underlying price. I graph daily and weekly option values at every percent, + and -, of different underlying price ranges and with + and - changes in IV. That way it is easy to see what happens if the stock goes up and down, or IV changes, etc.

These kinds of calcs should be plenty good enough for "what if" speculation. At least they have been for me, for a long time.

 

[Eyez]

why don't you just take the top of the book quotes and then figure out the rate from that to get an idea of what rate is being used??

 

[Martinghoul]

Quote from sle:
You "rate" here is a combination of dividends, borrow rate and the actual interest rate. That's why you are getting negative rates.

Yeah, looks like OP is confounding a few things here...

The right rate to use is the funding rate, whatever it might be, in your particular case (not that it matters that much, but anyways).

 

[stoic]

Quote from sle:

You don't need to use Black-Scholes for that - just calculate your projected P&L based on greeks.

The Greeks are voodoo as well !

 

[sle]

Quote from stoic:

The Greeks are voodoo as well !

Any sufficiently advanced technology is indistinguishable from magic.
Arthur C. Clarke