Why are there illegal option orders in the orderbook?

spy · May 7, 2023

newwurldmn said:
no one uses last trade for the options. In liquid names we will use last trade for the underlying because of ease. In illiquid names you will use current mid.

I used the roster of the '27 Yankees to predict the outcome of today's game and it worked great.

newwurldmn · May 7, 2023

spy said:
I used the roster of the '27 Yankees to predict the outcome of today's game and it worked great.

It’s relevant because of their pinstripes

.

TrailerParkTed · May 7, 2023

newwurldmn said:
1. Two people can trade an option on any price they want. It doesn't have to be non-arbitrageable nor does it have to fit some implied vol calculation or black scholes model.

2. I do, but i'm not going to dig it up. You can look for it online if you want. But notice how many illiquid options have bid ask spreads of 4.9. it's not a coincidence.

3. If you believe that, you don't understand how volatility trading works.

You and Dest are very generous with your time and deep financial expertise. I wish posters who challenged your answers understood that.

newwurldmn · May 7, 2023

TrailerParkTed said:
You and Dest are very generous with your time and deep financial expertise. I wish posters who challenged your answers understood that.

I appreciate those kind words. I love talking about this stuff.

earth_imperator · May 8, 2023

My tip to everybody:
I came to the conclusion that one ALWAYS IMMEDIATELY has to recalculate Bid, Ask, IV using the very current data (Spot, DTE, MidPrice, Risk-Free Interest Rate etc.).
The difference is like night and day and really gives a good insight.
I added 3 new fields named OriginalBid, OriginalAsk, OriginalIV which I fill from the Bid, Ask, IV. And then modify the Bid, Ask, IV with my own calculations... Ie. I keep the originals only to see the difference...
Ie. I'm now re-calculating the whole option chain table every time I download new data...

Re-calculating IV is a little bit costly, but I 'm using a binary-search algorithm with some optimizations (esp. regarding accuracy and with it when to abort the search. On average only about 25 interval-halving steps are used...).

Here's an example of re-calculated data of last Friday at around 10 minutes before market close:
compare B to OB, A to OA, IV to OIV ("O" meaning the original data):

Code:

FAZE_051923P5       K=5.00   L=4.60   B=4.5001  + A=4.8142  - IV=1061.9354- OB=4.20   OA=6.40   OIV=1494.3
FAZE_051923P7.5     K=7.50   L=7.16   B=7.0001  + A=7.3136  - IV=1141.1285- OB=6.70   OA=8.90   OIV=1569.6
WE_052623P.5        K=0.50   L=0.15   B=0.0700  + A=0.3375  - IV=388.2921 - OB=0.00   OA=0.35   OIV=777.61
NVAX_051923P4.5     K=4.50   L=0.20   B=0.0300    A=1.0559  - IV=368.7644 - OB=0.03   OA=2.21   OIV=518.09
NVAX_052623P4       K=4.00   L=0.16   B=0.0100    A=1.0753  - IV=347.6816 - OB=0.01   OA=2.21   OIV=489.45
FAZE_061623P5       K=5.00   L=4.50   B=4.5001  + A=4.8717  - IV=655.5939 - OB=4.00   OA=6.70   OIV=982.52
NVAX_051923P5.5     K=5.50   L=0.27   B=0.0200    A=1.1286  - IV=279.3562 - OB=0.02   OA=2.38   OIV=410.69
NVAX_060923P3.5     K=3.50   L=0.17   B=0.0300    A=1.2175  - IV=330.5501 - OB=0.03   OA=2.26   OIV=469.02
NVAX_060223P4       K=4.00   L=0.17   B=0.0100    A=1.1089  - IV=305.1636 - OB=0.01   OA=2.29   OIV=431.50
NVAX_060223P4.5     K=4.50   L=0.15   B=0.0200    A=1.1407  - IV=268.7991 - OB=0.02   OA=2.35   OIV=383.40
NVAX_051223P4.5     K=4.50   L=0.10   B=0.0700    A=0.1893  - IV=312.8043 - OB=0.07   OA=0.39   OIV=350.18
NVAX_052623P6       K=6.00   L=0.54   B=0.1600    A=1.2941  - IV=219.9522 - OB=0.16   OA=2.53   OIV=319.22
BFH_051923P17.5     K=17.50  L=0.30   B=0.0500    A=2.2796  - IV=232.9402 - OB=0.05   OA=4.80   OIV=321.27
NVAX_060923P5       K=5.00   L=0.35   B=0.1000    A=1.3766  - IV=234.2030 - OB=0.10   OA=2.40   OIV=338.17
ACB_062323P.5       K=0.50   L=0.06   B=0.0100    A=0.2425  - IV=237.2915 - OB=0.01   OA=0.43   OIV=408.35
FLUX_051923P2.5     K=2.50   L=0.05   B=0.0500    A=0.1976  - IV=237.6740 - OB=0.05   OA=0.45   OIV=284.16
WE_061623P5         K=5.00   L=2.48   B=4.5700  + A=4.8000    IV=595.7031 - OB=4.40   OA=4.80   OIV=1248.0
NVAX_051223P5.5     K=5.50   L=0.24   B=0.1600    A=0.1611  - IV=233.3650 - OB=0.16   OA=0.24   OIV=233.64
NVAX_051223P5       K=5.00   L=0.15   B=0.1186  - A=0.1186  - IV=256.5511   OB=0.14   OA=0.16   OIV=256.55
NVAX_060223P5.5     K=5.50   L=0.45   B=0.0500    A=1.1967  - IV=206.0384 - OB=0.05   OA=2.45   OIV=301.61
IBRX_061623P5       K=5.00   L=1.24   B=1.1000    A=1.1425  - IV=196.9266 - OB=1.10   OA=1.35   OIV=200.12
VRM_061623P.5       K=0.50   L=0.04   B=0.0200    A=0.1286  - IV=228.5036 - OB=0.02   OA=0.24   OIV=309.46
SI_051923P1         K=1.00   L=0.05   B=0.0500    A=0.0590  - IV=200.5441 - OB=0.05   OA=0.10   OIV=207.38
IBRX_061623P2.5     K=2.50   L=0.30   B=0.2980  - A=0.2980  - IV=256.5271   OB=0.30   OA=0.35   OIV=256.53
TUP_061623P1        K=1.00   L=0.30   B=0.2000    A=0.2346  - IV=186.9109 - OB=0.20   OA=0.25   OIV=199.93
NVAX_051923P5       K=5.00   L=0.20   B=0.2032  - A=0.2032  - IV=214.5810   OB=0.21   OA=0.26   OIV=214.58
SI_061623P1         K=1.00   L=0.18   B=0.1500    A=0.1582  - IV=194.5779 - OB=0.15   OA=0.20   OIV=197.65
NVAX_062323P4.5     K=4.50   L=0.24   B=0.0200    A=1.3366  - IV=218.8107 - OB=0.02   OA=2.45   OIV=319.70
SI_052623P1         K=1.00   L=0.10   B=0.0500    A=0.0834  - IV=178.7004 - OB=0.05   OA=0.15   OIV=198.22
SI_060923P1         K=1.00   L=0.20   B=0.1000    A=0.1331  - IV=182.0350 - OB=0.10   OA=0.20   OIV=195.83
SI_062323P1         K=1.00   L=0.20   B=0.1500    A=0.1974  - IV=193.6239 - OB=0.15   OA=0.30   OIV=209.85
NVAX_060923P6.5     K=6.50   L=0.85   B=0.1400    A=1.6275  - IV=162.0030 - OB=0.14   OA=2.73   OIV=255.04
NVAX_060223P6       K=6.00   L=0.54   B=0.0400    A=1.0656  - IV=163.2470 - OB=0.04   OA=2.21   OIV=241.98
NVAX_052623P5       K=5.00   L=0.31   B=0.0200    A=0.4681  - IV=186.7484 - OB=0.02   OA=0.98   OIV=242.48
SI_060223P1         K=1.00   L=0.15   B=0.0500    A=0.1026  - IV=164.5425 - OB=0.05   OA=0.20   OIV=190.29
VUZI_072123P3       K=3.00   L=0.25   B=0.0500    A=1.9370  - IV=237.0536 - OB=0.05   OA=3.80   OIV=443.46
IMUX_072123P1.5     K=1.50   L=0.35   B=0.1000    A=1.0012  - IV=225.6542 - OB=0.10   OA=1.95   OIV=435.52
SRPT_051923P100     K=100.00 L=3.80   B=3.5000    A=3.7926  - IV=157.1624 - OB=3.50   OA=4.30   OIV=159.59
SRPT_060223P105     K=105.00 L=9.20   B=6.7000    A=8.4635  - IV=136.6460 - OB=6.70   OA=10.20  OIV=144.80
NNOX_061623P12.5    K=12.50  L=1.35   B=1.3500    A=1.3820  - IV=136.8140 - OB=1.35   OA=1.80   OIV=137.78
UVIX_062323P10      K=10.00  L=1.55   B=1.4500    A=1.5721  - IV=137.0348 - OB=1.45   OA=1.75   OIV=141.21
TUP_072123P1        K=1.00   L=0.33   B=0.3000    A=0.3232  - IV=191.3756 - OB=0.30   OA=0.35   OIV=198.10
IBRX_072123P5       K=5.00   L=1.50   B=1.1500    A=1.3145  - IV=157.7994 - OB=1.15   OA=1.55   OIV=167.03
MRAI_072123P5       K=5.00   L=2.67   B=4.3595  + A=4.7000    IV=404.1958 - OB=4.10   OA=4.70   OIV=583.93

earth_imperator · May 8, 2023

Update to the above table: this here includes also the Spot (named "US") and DTE.
And: I do recalc the IV only if Bid or Ask gets changed by checking the boundaries (minPremium, maxPremium as was previously posted here).
And: of course these re-calculated Bid, Ask, IV are just some theoretical values (but more realistic values) intended as input for trading systems that make use of these data and use only limit orders. Of course these are not real Bid, Ask, IV (as said, the real/original values are saved in OB, OA, OIV) .

Code:

FAZE_051923P5       DTE=14  US=0.4999   K=5.00   L=4.60   B=4.5001  + A=4.8142  - IV=1061.9354- OB=4.20   OA=6.40   OIV=1494.34  ...
FAZE_051923P7.5     DTE=14  US=0.4999   K=7.50   L=7.16   B=7.0001  + A=7.3136  - IV=1141.1285- OB=6.70   OA=8.90   OIV=1569.63
WE_052623P.5        DTE=21  US=0.4300   K=0.50   L=0.15   B=0.0700  + A=0.3375  - IV=388.2921 - OB=0.00   OA=0.35   OIV=777.61
NVAX_051923P4.5     DTE=14  US=7.7000   K=4.50   L=0.20   B=0.0300    A=1.0559  - IV=368.7644 - OB=0.03   OA=2.21   OIV=518.09
NVAX_052623P4       DTE=21  US=7.7000   K=4.00   L=0.16   B=0.0100    A=1.0753  - IV=347.6816 - OB=0.01   OA=2.21   OIV=489.45
FAZE_061623P5       DTE=42  US=0.4999   K=5.00   L=4.50   B=4.5001  + A=4.8717  - IV=655.5939 - OB=4.00   OA=6.70   OIV=982.52
NVAX_051923P5.5     DTE=14  US=7.7000   K=5.50   L=0.27   B=0.0200    A=1.1286  - IV=279.3562 - OB=0.02   OA=2.38   OIV=410.69
NVAX_060923P3.5     DTE=35  US=7.7000   K=3.50   L=0.17   B=0.0300    A=1.2175  - IV=330.5501 - OB=0.03   OA=2.26   OIV=469.02
NVAX_060223P4       DTE=28  US=7.7000   K=4.00   L=0.17   B=0.0100    A=1.1089  - IV=305.1636 - OB=0.01   OA=2.29   OIV=431.50
NVAX_060223P4.5     DTE=28  US=7.7000   K=4.50   L=0.15   B=0.0200    A=1.1407  - IV=268.7991 - OB=0.02   OA=2.35   OIV=383.40
NVAX_051223P4.5     DTE=7   US=7.7000   K=4.50   L=0.10   B=0.0700    A=0.1893  - IV=312.8043 - OB=0.07   OA=0.39   OIV=350.18
NVAX_052623P6       DTE=21  US=7.7000   K=6.00   L=0.54   B=0.1600    A=1.2941  - IV=219.9522 - OB=0.16   OA=2.53   OIV=319.22
BFH_051923P17.5     DTE=14  US=25.0100  K=17.50  L=0.30   B=0.0500    A=2.2796  - IV=232.9402 - OB=0.05   OA=4.80   OIV=321.27
NVAX_060923P5       DTE=35  US=7.7000   K=5.00   L=0.35   B=0.1000    A=1.3766  - IV=234.2030 - OB=0.10   OA=2.40   OIV=338.17
ACB_062323P.5       DTE=49  US=0.6510   K=0.50   L=0.06   B=0.0100    A=0.2425  - IV=237.2915 - OB=0.01   OA=0.43   OIV=408.35
FLUX_051923P2.5     DTE=14  US=3.9499   K=2.50   L=0.05   B=0.0500    A=0.1976  - IV=237.6740 - OB=0.05   OA=0.45   OIV=284.16
WE_061623P5         DTE=42  US=0.4300   K=5.00   L=2.48   B=4.5700  + A=4.8000    IV=595.7031 - OB=4.40   OA=4.80   OIV=1248.03
NVAX_051223P5.5     DTE=7   US=7.7000   K=5.50   L=0.24   B=0.1600    A=0.1611  - IV=233.3650 - OB=0.16   OA=0.24   OIV=233.64
NVAX_051223P5       DTE=7   US=7.7000   K=5.00   L=0.15   B=0.1186  - A=0.1186  - IV=256.5511   OB=0.14   OA=0.16   OIV=256.55
NVAX_060223P5.5     DTE=28  US=7.7000   K=5.50   L=0.45   B=0.0500    A=1.1967  - IV=206.0384 - OB=0.05   OA=2.45   OIV=301.61
IBRX_061623P5       DTE=42  US=5.5500   K=5.00   L=1.24   B=1.1000    A=1.1425  - IV=196.9266 - OB=1.10   OA=1.35   OIV=200.12
VRM_061623P.5       DTE=42  US=0.8278   K=0.50   L=0.04   B=0.0200    A=0.1286  - IV=228.5036 - OB=0.02   OA=0.24   OIV=309.46
SI_051923P1         DTE=14  US=1.3700   K=1.00   L=0.05   B=0.0500    A=0.0590  - IV=200.5441 - OB=0.05   OA=0.10   OIV=207.38
IBRX_061623P2.5     DTE=42  US=5.5500   K=2.50   L=0.30   B=0.2980  - A=0.2980  - IV=256.5271   OB=0.30   OA=0.35   OIV=256.53
TUP_061623P1        DTE=42  US=1.0900   K=1.00   L=0.30   B=0.2000    A=0.2346  - IV=186.9109 - OB=0.20   OA=0.25   OIV=199.93
NVAX_051923P5       DTE=14  US=7.7000   K=5.00   L=0.20   B=0.2032  - A=0.2032  - IV=214.5810   OB=0.21   OA=0.26   OIV=214.58
SI_061623P1         DTE=42  US=1.3700   K=1.00   L=0.18   B=0.1500    A=0.1582  - IV=194.5779 - OB=0.15   OA=0.20   OIV=197.65
NVAX_062323P4.5     DTE=49  US=7.7000   K=4.50   L=0.24   B=0.0200    A=1.3366  - IV=218.8107 - OB=0.02   OA=2.45   OIV=319.70
SI_052623P1         DTE=21  US=1.3700   K=1.00   L=0.10   B=0.0500    A=0.0834  - IV=178.7004 - OB=0.05   OA=0.15   OIV=198.22
SI_060923P1         DTE=35  US=1.3700   K=1.00   L=0.20   B=0.1000    A=0.1331  - IV=182.0350 - OB=0.10   OA=0.20   OIV=195.83
SI_062323P1         DTE=49  US=1.3700   K=1.00   L=0.20   B=0.1500    A=0.1974  - IV=193.6239 - OB=0.15   OA=0.30   OIV=209.85
NVAX_060923P6.5     DTE=35  US=7.7000   K=6.50   L=0.85   B=0.1400    A=1.6275  - IV=162.0030 - OB=0.14   OA=2.73   OIV=255.04
NVAX_060223P6       DTE=28  US=7.7000   K=6.00   L=0.54   B=0.0400    A=1.0656  - IV=163.2470 - OB=0.04   OA=2.21   OIV=241.98
NVAX_052623P5       DTE=21  US=7.7000   K=5.00   L=0.31   B=0.0200    A=0.4681  - IV=186.7484 - OB=0.02   OA=0.98   OIV=242.48
SI_060223P1         DTE=28  US=1.3700   K=1.00   L=0.15   B=0.0500    A=0.1026  - IV=164.5425 - OB=0.05   OA=0.20   OIV=190.29
VUZI_072123P3       DTE=77  US=4.0000   K=3.00   L=0.25   B=0.0500    A=1.9370  - IV=237.0536 - OB=0.05   OA=3.80   OIV=443.46
IMUX_072123P1.5     DTE=77  US=1.6500   K=1.50   L=0.35   B=0.1000    A=1.0012  - IV=225.6542 - OB=0.10   OA=1.95   OIV=435.52
SRPT_051923P100     DTE=14  US=131.1000 K=100.00 L=3.80   B=3.5000    A=3.7926  - IV=157.1624 - OB=3.50   OA=4.30   OIV=159.59
SRPT_060223P105     DTE=28  US=131.1000 K=105.00 L=9.20   B=6.7000    A=8.4635  - IV=136.6460 - OB=6.70   OA=10.20  OIV=144.80
NNOX_061623P12.5    DTE=42  US=15.3700  K=12.50  L=1.35   B=1.3500    A=1.3820  - IV=136.8140 - OB=1.35   OA=1.80   OIV=137.78
UVIX_062323P10      DTE=49  US=11.3350  K=10.00  L=1.55   B=1.4500    A=1.5721  - IV=137.0348 - OB=1.45   OA=1.75   OIV=141.21
TUP_072123P1        DTE=77  US=1.0900   K=1.00   L=0.33   B=0.3000    A=0.3232  - IV=191.3756 - OB=0.30   OA=0.35   OIV=198.10
IBRX_072123P5       DTE=77  US=5.5500   K=5.00   L=1.50   B=1.1500    A=1.3145  - IV=157.7994 - OB=1.15   OA=1.55   OIV=167.03
MRAI_072123P5       DTE=77  US=0.6405   K=5.00   L=2.67   B=4.3595  + A=4.7000    IV=404.1958 - OB=4.10   OA=4.70   OIV=583.93

earth_imperator · May 8, 2023

earth_imperator said:
Here's some C++ code that returns the valid min and max premiums for the specified parameters.
Works both for Call and Put options.
If you see quotes outside these limits, then be alerted about fraudulent quotes...

Code:

struct MinMax_t { double Min, Max; MinMax_t(const double AMin, const double AMax) : Min(AMin), Max(AMax) {} }; MinMax_t get_min_max_premium(const bool fCall, const double UnderlyingSpot, const double Strike) { return MinMax_t(max(0.0, fCall ? UnderlyingSpot - Strike : Strike - UnderlyingSpot), fCall ? UnderlyingSpot : Strike); }

Ie. calling the above function like this:
...
MinMax_t MM = get_min_max_premium(fCall, UnderlyingSpot, Strike);
...
Ie. the result is in the structure MM...

I've improved the above method by using 2 BSM calls (one for min, one for max). It's computationally of course more costly, but also more accurate than the above method.
Drop me a PM if you need the C++ code (but you already should have the BSM function as this just calls it with some params).

vanzandt · May 8, 2023

newwurldmn said:
no one uses last trade for the options. In liquid names we will use last trade for the underlying because of ease. In illiquid names you will use current mid.

I just expanded my option chains and looked at what columns were available to select.
IV bid, IV ask, and IV mid are all available.

spy · May 8, 2023

vanzandt said:
I just expanded my option chains and looked at what columns were available to select.
IV bid, IV ask, and IV mid are all available.

That's probably because people on the buy-side will be more interested in the ask and people on the sell-side will be more interested in the bid. I think it's important to remember that IV is, in a sense, a make believe number... it's trying to quantify expectations; of which there may be quite a few. The real question IMHO when trading vol is: what is your expectation.

vanzandt · May 8, 2023

spy said:
That's probably because people on the buy-side will be more interested in the ask and people on the sell-side will be more interested in the bid. I think it's important to remember that IV is, in a sense, a make believe number... it's trying to quantify expectations; of which there may be quite a few. The real question IMHO when trading vol is: what is your expectation.

If this thread has done anything, because I pay attention to Newurldman, I've learned quite a bit of new stuff about IV going down the rabbit-hole reading things.