Stock Option Proxies for Dow, S&P & NAZ

[theTaoTrader]

Quote from maglia rosa:

The daily price range (high/low) in an option is of no significance at all. It says nothing. The market in the option moves around, whether there is a trade or not, so the low print might not be the intraday low in the option.
A useful proxy to see whether a bid/ask spread is good: take the difference of bid and ask and divide by the option's vega. This gives you a measure of how many vol points wide the market is. When you compare the spreads on options with different underlyings, you have to consider each option's vega. A 0.50 delta option in the OEX will have considerably more vega than a 0.50 delta option in the DIA, and there's even less vega in a 0.50 delta QQQ option.

You are absolutely right that "the low print might not be the intraday low in the option." Since my holding period is several weeks, I don't pay too much attention to option's daily high and low anyway. It's very hard to day trade options.

An option's vega is proportional to its underlying. So DIA's option will be about three times of QQQ's Vega. I have been using (ask-bid)/midpoint of bid and ask as one criteria to select which options to trade. The order is OEX, DIA and QQQ (best to worst). Using your formula (ask-bid)/vega, with the bigger Vega of DIA as a compensator, the difference is even more significant. This measure makes a lot more sense. Thank you!

 

[NoMoreOptions]

It seems to me that we have not only many trade gamblers here but also many mathematicians. I hope they know and you understand what they are talking about. But in my opinion, once you understand the true fundamental principle of options trading in which you know you will never have a leading role, your options enthusiasm will fade pretty soon. For those who don't know (like myself), do not, I repeat, do not do options to avoid compulsive gamble.

 

[theTaoTrader]

Quote from NoMoreOptions:

It seems to me that we have not only many trade gamblers here but also many mathematicians. I hope they know and you understand what they are talking about. But in my opinion, once you understand the true fundamental principle of options trading in which you know you will never have a leading role, your options enthusiasm will fade pretty soon. For those who don't know (like myself), do not, I repeat, do not do options to avoid compulsive gamble.

Interesting comments. The theory of probability in a large part grew out of the need of gambling in middle of the seventeenth century. Trading option is very risky, but that's where potential reward is. There's no free lunch. The key is to take CALCULATED risk, and you need math to do that.