price percentile

[WeToddDid2]

Hi,

i want to develop an idea - price percentile (or price rank)
like the concept of IV Percentile (or IVRank)
where we are looking for the current IV, and compare it to the IV of the last year,
checking in which percentile the IV is now (high IVR is much more profitable with TastyTrade concepts because High IVR = higher premium to sellers and IV will shrink).

i wonder, maybe we can develop a price percentile.
the price of the option is generated from several parameters (free interest rate, IV, time to expire, strike price), but at the end the price is the balance between buyers and sellers.
maybe some buyers/sellers think that Black–Scholes model is not optimal, and they think that the option is under/over priced or due to the flash crash the put side is more expensive due to fear,
whatever the reasons, the price is the price.

yes, there will probably be a correlation between high IV and high price.

so if we can compare prices between strikes or time to expire (after we normalize it !),
we can see that right now the price is very high comparing to other strike or different time to expiration, and then we can decide what to do with it.

i want to think with you if we can calculate something that will say that this price is too high/low comparing to prices like him,
and maybe we can look for all the prices with the same DTE and with the same distance from ATM,
and check the percentile.
by the way - we will must normalize the parameters, because we need to get many values to compare with each other.

i attached 3 examples -
1. different days before expiration (DTE), the same distance from ATM
2. different dates, the same DTE, the same IV (0.20-0.21), the same distance from ATM
3. the same date, the same DTE, different strikes

in #1 i added the theta, so we could use it to normalize the price with the DTE

the examples are to show you that the option prices can be high or low regardless the IV, regardless of DTE.

View attachment 162880

what do you think ?

Shay

What are the inputs for the IV formula? Does it include options premium or price as you call it? I don't think that you fully understand implied vol, IV rank, IV percentile, etc.

 

[cvds16]

well, I am going to refrain from further comment ... just wanted to point out that this (the mean reverting) might work for a long time in rather normal slow markets but when it gets wild it will totally stop working ... I gave some examples; this happens every few years or so and when it does it can be monstrous ... your database is obviously too young to have these in them ... most people here joining the thread don't seem to have too much option knowledge ... let's say I did what I could do, now it's up to you to draw lessons from the things I wrote or not ... the only way you'd probably could make this work is when have a balanced portfolio of under and overvalued options and stop trading when you don't have the balanced portfolio model anymore ...

 

[stepandfetchit]

Shay: I am a bit confused why you are focusing on the price of the option, instead of the IV of the option. If you focus on the IV, that is the "only unknown variable". The price contains strike, underlying price, DTE, interest rates, dividends, whether PUT or CALL, which are ALL known. I think you may be attempting to detect "mispriced" options? If so, that will be represented in the IV values which are possibly out of the norm. However, perhaps I have missed your intentions. (Note: I have been focusing on IV lately, so I may be like the guy with a new hammer will all problems looking like a nail!) ;-)