Question for the Option Scientist:Â What are you using to track option prices?
Answer:Â Obtaining the price, or premium, of an option can be both difficult and expensive. That may be surprising to some, as there are so many financial sites that provide free viewing of option chains. But, most option chains only provide current premiums for options that have not yet expired. Since my weekly analysis requires historical premiums for options that have already expired, typical option chain data is not helpful.
As an example, here in April 2014, it is nearly impossible to find free information regarding the premium of an option with a January 2014 expiration, let alone the premium on a specific historical date, such as December 12, 2013. There are services that compile such information, but the fees can be prohibitive.
Instead, I use several mathematical formulas that I originally developed as a means of evaluating the fairness of option premiums. These formulas generate hypothetical option premiums which are almost always at or very near the actual premiums.
Since the formulas provide hypothetical data, I use them not only for determining historical premiums for options that have since expired, but also for determining the premiums at which options would have traded if they existed.
For example, the April 4 weekly expiration likely had not been introduced for trading way back in December (weekly expirations are typically not introduced more than a month or two before expiration day). Even so, the formulas can determine what the premiums would have been.
The preceding is a post by Christopher Ebert, co-author of the popular option trading book “Show Me Your Options!†He uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to [email protected]
