William G. Murray writes: I would be very interested in your method of calculation.
I use a rudimentary excel spreadsheet, since I haven't actually taken the time to learn how to do the things right. Most of the time I still use pencil and paper to map things out.
The formula in McMillan is correct, but only for European Style options.
Gibson in OPTION VALUATION Analyzing and Pricing Standardized Option Contracts uses the expression to provide a lower bound to the price of the put option. Thus, using McMillan's terminology, with 0 dividends
theoretical call price + strike price - stock price >=
theoretical put price >=
theoretical call price + Present value of the strike price - stock price
I substitute the actual call price for the option.
Thus if we have 5 variables, Stock Price A1, Strike Price A2, Rate A3, Days A4, Call Price A5 then Upper Limit = A5 + A2 - A1 and Lower Limit = A5 - A2 * PV(A3*A4/365,1,0,1,1) - B1
The sign in front of B2 is negative because the PV function returns a - value for outgoing funds.
I suppose I should compute limits using both bid and ask. Sometimes I check, usually I just look if the price seems off to me.
I don't have any good tools yet; I'm still investigating them. Several of the things I've looked at just don't make sense. I saw one tool which would let you change the volatility from 1 to 100 and it never changed the price of the option.
I have Omega Research's QuickOptions product which comes with super charts, I'm planning on looking at PC Quotes TurboOptions feature.
I've seen a few others, but most of them seem to rely fairly heavily on the Black-Scholes Model, ignoring entirely the fact that the model only applies to european style options. |
