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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: OX who wrote (1616)8/25/2000 10:54:45 PM
From: KFE  Read Replies (2) of 2317
 
OX,

does this have to do with euro-style expiration of most index options? (i.e., i understand that lack of early exercise tends to effect the pricing of euro-style options, is this what you mean?

It mostly has to do with conversion and reversal arbitrage which are generally not practical on index options. Conversions and reversals are also what keep the put/call parity in line.

"If the BSM model was truly efficient there would not be any skew."
won't the skew still exist regardless of the options model used?

Two reasons:
1. There can be only one actual volatility over the life of an option and that volatility will not be know until expiration but it will have been the same for all strikes.

2. The BSM consistently values OTM options lower than the market place does.

OT:Remember also that Myron Scholes was one of the people behind Long Term Capital.

I suspect you've been trading options so long, you have a better "feel" for pricing and volatility movements you probably don't need to use an options calculator very often... just a guess ;-)

That is true especially for the small basket of stocks that I have been trading for a long time. After trading the same stocks for an extended period it is fairly easy to eyeball an option chain and estimate workable values.
Trading the same issues for an extended period also allows you to know if there were or are some events which might have caused unusual temporary IV movement in the underlying. Traders who rely on services that use scans to find under/over valued options may not realize this.

Regards,

Ken
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