I have looked for this, but I can't find it. Only thing people tend to say is that options are priced by B-S and cite the efficient market theory. But, if that was true, there wouldn't be a bid-ask spread… Therefore, there must be a discrepancy and therefore, the titular question.
Is there a website or tool that compares Black–Scholes option pricing against current Bid/Ask?
byu/IcarusOnReddit inoptions
Posted by IcarusOnReddit
11 Comments
Yes, but you most likely won’t find it thru retail brokers… prop firms have technology that plots best fit curves vs market prices and identify what is out of whack…. They will see the 15 delta puts are smashed vs 30 delta puts are over priced and sell the put spread hoping it reverts back in line
Firstly: In essence you’re comparing IV to average HV when you compare current bid ask to a theoretical bs value. That’s black and scholes, not bullsh…
Secondly the option markets are far from efficient: that’s why we need market maker’s to make the market. To get it to a point where there’s enough liquidity to iron out the larger inefficiencies. The bid ask spread is the fee we pay market maker’s for this service.
IV is calculated for black scholes, from the price… so not really, youll just recalculate IV with a different slant.
Vanilla options are NEVER priced with black scholes. BSM is, for the purposes of pricing, an outdated formula that contains many flaws. Black scholes has applications in the option market, but it isn’t for pricing options. Newer, better models are used for option pricing.
I have found that generally the stated IV on the ThinkorSwim platform is pretty close to what I get when I derive it from prices using Newton-Raphson method & Black-Scholes to iterate.
Yes, there are other ways to price options. I personally don’t think I am going to find an edge by building a better pricing model, or really any brute-force computational domain.
Huh? The bid/ask spread can exist even if the mid price was exactly correct. That spread is the price for immediacy.
You sound like you have collect a bunch of half truths , from a lot of un reliable sources. Take a break and review this Vid from one of the designers of the Tos Analyze / Risk Profile page.
Tom Preston http://ontt.tv/2vTPn6m
Here are some terms he uses.
Vol Index IV blends OTM option prices into an overall IV
Per Strike IV Derived from a single options’s price … equivalent to the market price
Difference between these two quantifies excess risk premium … target of video
PSA…. The Black Scholes is just an old option pricing model. It is only a model.
All the brokers and market makers have much more advanced option pricing models. Those are proprietary.
There is nothing wrong with the Black Scholes for retail. Just know the limitations of the model.
It’s true that Black-Scholes assumes a frictionless market. Having said that, neither the bid nor the ask are “valid” prices as they’re both offers: an offer to sell and an offer to buy.
You can use any Black-Scholes online calculator (https://goodcalculators.com/black-scholes-calculator/) to determine what you believe is a fair price.
I know what you are looking for. Find more information on IV rank and Volatility smile.
Current bid/ask is a spread, not necessarily an option value. The theoretical option value, the product of the pricing model, is what would initially create the spread. And the trading activity is where over or undervalued options occur based on what the market is willing to pay in relation to the theoretical value produced by the pricing model.
The output of any option pricing model is derived from the current share price, the strike price, dte, current interest rate, and a volatility value (likely its last produced IV). From this, the theoretical option value is derived.
Trying to connect IV in any repeatable and lasting way to the spread is pointless if for no other reason than varying volumes and changing pricing model factors. Supply & demand still ultimately control option value.