Reaching midpoint

[sle]

What do you think about bidding/offering at the theoretical option price (assuming its within bid/ask)? Let's say I want to automate my orders, wouldn't theoretical price give me a good real-time benchmark for "fairness?" Let's assume whatever model I use is close enough for my purse.

Your theoretical price will be using implied volatility which will be based on the options price in the market you see where I am going, right?

I'm afraid that idea might work in theory but not in practice and you wouldn't get filled. I'd say the bid/ask/mid are reality and what we must work with.

If your theo is at or above the mid (which it would be sometimes) and MMs are axed to sell, you will get filled. Theoretical option price is just an interpolation method, nothing more and has the same probability of getting you where you want to be as any other method.

 

[sss12]

Your theoretical price will be using implied volatility which will be based on the options price in the market you see where I am going, right?


If your theo is at or above the mid (which it would be sometimes) and MMs are axed to sell, you will get filled. Theoretical option price is just an interpolation method, nothing more and has the same probability of getting you where you want to be as any other method.

@sle ...since this thread has run its course and you are here. I'll highjack and ask you a question if you do not mind.

I swing trade usually using long ATM options as a vehicle. Concerning losses and getting out, if I am wrong would I be better if my original position was in a 60 delta ie: it moves to 50 and I'm tyring to exit at a loss ..or..starting at 50 delta and exiting at a loss at 40 delta ?? or is this to simplified ? thanks

mostly asking from a spread perspective. thanks

 

[spindr0]

@sle Concerning losses and getting out, if I am wrong would I be better if my original position was in a 60 delta ie: it moves to 50 and I'm tyring to exit at a loss ..or..starting at 50 delta and exiting at a loss at 40 delta ??

An option dropping from 60 delta to 50 delta will lose more $$ than dropping from 50 delta to 40 delta.

 

[BrooksRimes]

Again, these answers (including mine) are just guesses as to what will happen. The best thing to do is live experiments with small orders (i.e. 1 contract) to see what really happens. And you will need a number of orders over time, perhaps 20 to 30, to have any statistical significance as to what is likely to happen going forward.

Brooks

 

[tommcginnis]

I'm afraid that idea might work in theory but not in practice and you wouldn't get filled. I'd say the bid/ask/mid are reality and what we must work with. But, you could always do an experiment with 1 contract and see how it works out.

The model more-often-than-not, catches up with reality+the market, and not-so-much, anticipates it. If we're voting, I vote for experimentation, too.

 

[ironchef]

if the spread is too big then one trades the wrong instrument or the wrong time period

Why may I ask?

I am small mom and pop retail and usually trade options with wide bid/ask and little OI.