option pricing question

[flyingforget]

I am a newbie.In theory,the price of option is influenced by the below variables.Since the price of option is influenced by annual volatility of stock price ,so does the price of option have relationship with short term volatility ,e.g 15minutes volatility?




The variables are:

S = stock price
X = strike price
t = time remaining until expiration, expressed as a percent of a year
r = current continuously compounded risk-free interest rate
v = annual volatility of stock price (the standard deviation of the short-term returns over one year). See below for how to estimate volatility.
ln = natural logarithm
N(x) = standard normal cumulative distribution function
e = the exponential function

 

[dagnyt]

Quote from flyingforget:

I am a newbie.In theory,the price of option is influenced by the below variables.Since the price of option is influenced by annual volatility of stock price ,so does the price of option have relationship with short term volatility ,e.g 15minutes volatility?

Option prices depend on the Implied Volatility. In theory, a changing stock volatility can change the implied, but it's more likely that the implied volatility is affected by the entire world around us - not just that of the individual stock. At in today's markets.

Mark

 

[flyingforget]

thank you I mean could short term volatility e.g 15 minute affect the price of option?

 

[what_hedge]

Yes, short term volatility could definitely affect the price of an option, but perhaps not in the way you are thinking about it.

When it all comes down to it, there is no "plug-in" variable to the option pricing model that determines what an option is worth. Everything boils down to supply and demand considerations for options, and the more demand for options, the higher the price you pay (or higher the implied volatility) for those options.

In practice, erratic short term volatility would only affect the implied volatility of the options to the extent that it changed the "market's" expectation of volatility going forward.

Usually high realized short term volatility like you are referring to results in front month options being bid up in the marketplace.

There are no absolutes however, I have seen days with wild ranges in the underlying while implied volatility gets crushed nonetheless.

I hope this has made sense and answered your question, feel free to ask away if I have inadvertently confused you!

 

[Wayne Gibbous]

Quote from dagnyt:

Option prices depend on the Implied Volatility.

Mark

I think you mean "IV depends on the option price."

Recent volatility of the underlying, along with all the standard model parameters and supply/demand forces, and, let's face it, the whims of the market maker, all go into the mix to create an option's price.

From this, models are usually iterated to find the Vol that would equal the option price. This is then the Implied Vol.

 

[jeb9999]

Quote from Wayne Gibbous:

I think you mean "IV depends on the option price."

Recent volatility of the underlying, along with all the standard model parameters and supply/demand forces, and, let's face it, the whims of the market maker, all go into the mix to create an option's price.

From this, models are usually iterated to find the Vol that would equal the option price. This is then the Implied Vol.

The options market makers input a volatility into their models to generate option bid/ask prices.

It is the rest of us that have to iterate option pricing models to determine the implied volatility.

 

[flyingforget]

usually the implied volatility is caculated at the end of the day,

is there any software to calculate the IV with realtime?

 

[flyingforget]

S = stock price
X = strike price
t = time remaining until expiration, expressed as a percent of a year
r = current continuously compounded risk-free interest rate
v = annual volatility of stock price (the standard deviation of the short-term returns over one year). See below for how to estimate volatility.
ln = natural logarithm
N(x) = standard normal cumulative distribution function
e = the exponential function

in theory , the price of option is influenced by above variables.
but except s, the other variables are caculated at the end of day.
does that mean in theory the price of option is affected only by stock price intraday?am I correct?

 

[MTE]

Quote from flyingforget:

usually the implied volatility is caculated at the end of the day,

is there any software to calculate the IV with realtime?

Says who? Any decent options trading platform can calculate IV in real time.

 

[flyingforget]

Quote from MTE:

Says who? Any decent options trading platform can calculate IV in real time.

thank you MTE ,if the value caculated by the software does not equal to the real market price, then what causes the difference?