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ES OPTIONS
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ES OPTIONS

  #1 (permalink)
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ES OPTIONS

Hello,

I am currently exploring options on futures. I hope that some traders that are familiar with these products could help me with some basics.

The predominant underlying will be the ES, and the contract specifications are as follows:
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Source: E-mini S&P 500

Interpreting the minimum price fluctuation specification, do the option contracts with a greater value than 5 move with a minimum of .25 points, representing $12.50 per minimum price movement of the option contract?
Conversely, contracts trading <5 move in minimum increments of .05 which represents $2.50. Is this correct?

Additionally, what does CAB mean?
Is it: 'cabinet trade (cab)?

'A trade that allows options traders to execute deep out of the money options by trading the option at a price less than the minimum tick (based on the minimal allowable tick convention).'?

Lastly, what is are the most commonly used pricing models in options on futures?
I am personally not a fan of the Black Scholes model, and am not really looking to use an adjusted form of these. What other form would you recommend?

Thank you for your time, I am looking forward reading your reply.

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Cogito ergo sum View Post

Lastly, what is are the most commonly used pricing models in options on futures?
I am personally not a fan of the Black Scholes model, and am not really looking to use an adjusted form of these. What other form would you recommend?

Where do you take issue with the Black (1976) model? Your answer to that might provide an insight to the answer of what other models to consider.

Haug's book is really good to see how and why some pricing models have evolved.

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Cogito ergo sum View Post

Additionally, what does CAB mean?
Is it: 'cabinet trade (cab)?

'A trade that allows options traders to execute deep out of the money options by trading the option at a price less than the minimum tick (based on the minimal allowable tick convention).'?

Yes.

And Haug's stuff is great. Also the Hull book doesn't hurt.

Math. A gateway drug to reality.
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  #5 (permalink)
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Thank you MXASJ, and traderwerks for your responses.


MXASJ View Post
Where do you take issue with the Black (1976) model? Your answer to that might provide an insight to the answer of what other models to consider.

Haug's book is really good to see how and why some pricing models have evolved.

As of recently I am assessing various theoretical pricing models. This started after reading both the Black Swan, and Fooled by Randomness written by Taleb.

There is sufficient evidence to indicate that large fluctuations in the financial markets are far more common than Brownian motion predicts. Admittedly, options traders use the Merton Scholes model 'which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian'. According to Haug and Taleb http://www.maths-fi.com/article_Why_we_have_never_used_the_Black_Scholes_Merton_..._Haug_Taleb_nov_2007.pdf

I share the argument that our world does not necessarily fit a gaussian bell shaped distribution. This does not mean I am necessarily opposed to the Black Scholes Merton model. I am looking for a model that takes a different approach to this assumption. Admittedly, I am not really aware of any suitable alternatives. Especially if one is considering my lack of knowledge in regard to options pricing.


traderwerks View Post
Yes.

And Haug's stuff is great. Also the Hull book doesn't hurt.

Are you guys referring to the following books?
  • The Complete Guide to Option Pricing Formulas by Haug
  • Options, Futures and Other Derivatives by Hull

Additionally, what other books do you suggest in regards to option pricing?

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Quoting 

Are you guys referring to the following books?
  • The Complete Guide to Option Pricing Formulas by Haug
  • Options, Futures and Other Derivatives by Hull

Additionally, what other books do you suggest in regards to option pricing?

Yes, those are the two. Note that the Haug book has some mistakes in the formulas in some of the codes in the book. They may have fixed that in the 2ed. It is like a cookbook of option pricing formulas.

The Hull book I think was the first real book I ever read on derivatives. It was like the into pricing textbook back in the day. It is a little bit dry, but still a good book.

As for other books, there are a lot, I think it would depend on your style of trading.

Math. A gateway drug to reality.
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Every formula will have some problem because it's impossible to model those large tail events. That is why the volatility of different strikes (called skew) varies. One of the big factors in the different formulas is how they price American and European options. There is no substitute for experience and judgment in option trading like any other type of trading. Cabinet trades are used to liquidate positions in far out of the money options that would not otherwise trade at a regular price increment. In the ES this is apparently the same amount as a "half tick" but other contracts may have a higher minimum price tick where the cabinet price is lower.

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