How to Price Options During Trading
Why not just use bid/ask off my screen? Well the prices you are looking at are probably not accurate. Since most options are not trading every few minutes thereby giving you an idea of their value, you are likely looking at an inaccurate bid/ask. If you are looking at doing an option spread, one of the options bid/ask could be fresh and the other one several hours old. All of that can be very misleading and cause you to make an incorrect or ill-advised move.
Instead, look at where the futures contract is and use that movement to help you with the option price. Let's say the futures has moved up in an amount equal to 1 strike price. That means the call option you are looking at has increased in value and is likely to be priced at the price the option below the one you are looking at closed at yesterday. On puts it would be the one higher (closer to the futures price).
For example, lets say Dec corn is up 10-cents today. Yesterday the Dec 400 call closed at 14-cents and the Dec 390 call closed at 17-cents. Today, the Dec 400 call is likely to trade for 17-cents, the same price as the 390 call closed for yesterday.
If the market is down, the same process could be used. Look at the price of yesterday's Dec 410 call at 11 and assume the Dec 400 call should be priced at 11, yesterdays closing price on the 410 call.
If you need further help on this, please don't hesitate to call the Option Caddie at 1-800-780-7001
Vision provides Advantages in Options with clearing and other brokerage support services.
Advantages in Options is an introducing broker of Vision Financial Markets.
Copyright 2010 © Advantages in Options
All rights Reserved