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OptionTrader
Theoretical Option Prices
Last Activity 7/5/2018 1:02 PM
2 replies, 726 viewings

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John J

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Subject : Theoretical Option Prices
Posted : 1/28/2016 2:25 PM
Post #35984

May I suggest that theoretical price columns are added to the option chains (Call and Put prices respectively).?

In my opinion, it's important to have the theoretical price displayed in order to determine what should be a fair price before trading an option. Obviously, a trade execution may not occur at the theoretical price, but it’s at least a starting point.

See below example how this is displayed in a 3rd. party software application;



(The theoretical price of an option is the fair value of the option as determined by an option pricing model. This model (such as the Black-Scholes model) takes into account current values such as implied volatility, the price of the underlying, the strike price, and time to expiration to determine what an option should be worth. Each of the input values fluctuate, which means theoretical price will also be a fluctuating value.)


[Edited by John J on 1/28/2016 2:30 PM]

Attached file : Theoretical Price Colums.PNG (70KB - 273 downloads)

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Barry Cohen

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Subject : RE: Theoretical Option Prices
Posted : 1/29/2016 12:37 PM
Post #35986 - In reply to #35984

These are theoretical prices. They're used in Lab Mode or in backtesting.


Attached file : tprices.jpg (70KB - 268 downloads)

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John J

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Subject : RE: Theoretical Option Prices
Posted : 1/29/2016 3:03 PM
Post #35989 - In reply to #35984

Hi Barry,

See attached screen shot of some real time option grid data on AAL (from today). The 'Last' column displays several strike prices where trades never took place, hence prices = zero. I totally understand that once today's trading activity goes down in history, Nirvana has to replace all the zeros with theoretical price data.

What I'm asking for is theoretical option pricing in REAL time, though. This is absolutely critical information, especially on low liquidity options with huge ask/bid discrepancies.!!
Also, real time theoretical price calculations may act as a "safety valve" in the Option Finder as well. For instance if the 'Last' price happens to be way off the theoretical price, it should be rejected. Otherwise if the price happens to be zero, the theoretical price should be used in the calculations instead...



[Edited by John J on 1/29/2016 4:25 PM]

Attached file : Capture.PNG (66KB - 259 downloads)

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