Calculation of strikes

#1

I have been doing a lot of backtesting on ATM strikes but i have recently run into a brick wall. If I want to collect deep itm premium, how would i go about calculating it. i have looked at the black/scholes model and tried the calculators online but they are all meant for months out. Since binaries are mostly delta, how would i calculate volitility, delta, etc…

What I am trying to figure out is how I take my handy dandy calculator and say, Price is x, time left is x minutes, so if it moves at a certain rate, what will the price be (aprox)? I know there is a calculation for it. I just cant find it yet.

I am also running into a roadblock on trying to use the simulator to figure it out. where may i find the detailed instructions on how to use that?

I have been doing a type of ‘collecting premium’ on the /ym spreads and selling an DOTM binary to hedge risk and its working pretty good but im still at a loss about the calculations. any feedback would be great!

Thanks darrell!

#2

Atm would not be premium collection.

The big factor your missing is iv. That varies everyday throughout the day.

The calculation is the delta of a call with same strike same expiration equals binary mid price.

We are working on an online calculator tool that will calculate iv and then price based on price strike and expiration that we will add into the live binary scanner in the coming months.

#3

oh i know atm would not be premium collection. IV (or for those who are wondering what IV is. It is implied volatility) is a calculation I am looking for as well. Im gonna figure how to do it on a calculator but for now let me ask you this.

the delta of the call with the same strike and same expiration- are you talking about the delta of the actual option? because many times, they are months out. sometimes weeks out so this is where i am getting confused.

IV is another issue.

If there was a mathematical formula to look at, it would make sense. as of yet, i have found no formula. im looking forward to that calculator.

#4

Implied volatility is extracted from a options price and you have to know all the other greeks to get it. Even then there are about 30 formulas for implied volatility depending on what kind of implied volatility your looking for. Some are public the best are kept private. Your not going to pull it off on a standard calculator, Not accurately anyway. In addition it changes constantly based on supply demand in options movement in markets etc… its not really something you want to sit there and try to calculate manually during live intraday trading by the time you have done your calculation all the numbers will have changed.

Example of movement of IV in a day (this could cause a option to change by easy $10+ from high to low regardless of time or price)

05.13.2014-23.55.png1132x55

if you can calculate the delta of an call option with a call being the same strike as the binary using the same amount of time to expiraiton as a binary then yes that delta of the call is the price of the binary option but then again you have to extract the correct IV and input teh correct IV for the right strike based on the volatility skew. Maybe your used to diving in this deep but if not there is not a lot of benefit to it.

Fortunately like I said its in the works to automate all the info automatically. Ie on the scanner you can already calculate the binary price based on if the market moves. Next step we will be adding is time impact - so you can say if it moes this bar within x minutes. And we will add in IV if IV changes by this much. So you could use any of the three to calculate it as IV may move time may move and price may move. Welcome to the world of options :slight_smile:

Note IT DOES NOT need to be this hard. Have you watch my videos on what to focus on what prices you can know for sure and how you can take that to your advantage and how about speed of binaries etc…

Basically what strategy are you trying to do and i can tell you simply how to figure out what your trying to accomplish…without having to do a bunch of math.

Article links below on benzinga and yahoo finance that i write should also help. I talk a bit about what impacts a binaries price.

Benzinga | Stock Market Quotes, Business News, Financial News, Trading Ideas, and Stock Research by Professionals http://www.benzinga.com/markets/binary-options

https://finance.search.yahoo.com/search/;_ylc=X3oDMTFzbzgwazI0BGtleXcDbmFkZXgEbWlkA21lZGlhcXVvdGVzc2VhcmNoBHNlYwN1aGIyBHNsawNmaW5hbmNlX3NlYXJjaA--?p=nadex&type=2button&fr=uh3_finance_vert_gs

#5

here is what I am trying to figure out. If you look at the photo…

If I am selling the 16710 strike for 36.50 and the underlying moves to 16710, then that 36.50 is now worth 50 for a loss of 13.50 but if that happens and the strike of 16710 is worth 50, then how much would the 16750 strike be worth? currently it is worth 6.50 but i do not know how to figure out aprox how much that 6.50 would go up.

what if it takes 3 hours for price to hit 16710? or 5 hours? the time plays a role as well.

how can i calculate this?

<img src=/uploads/db0876/1231/20ba12d34113c091.png">

#6

Use the binary scanner

Enter the price on the simulator

It will tell you the price every strike will be on that move

That will change as time passes though

Its an insane amount of math and I have 2 math wizards working with me on it to simplify it for live stream into the scanner.

its not a simple a+b-c=d formula

The simple is the 0 50 100 that i teach.

But in reality who cares you don’t know what price it will be at by what time. So in reality it comes down to what system and startegy are you using

Why in the world would you even sell at $6.50 binary that is a horrible risk/reward in any circumstance bid/ask and fees alone. Just looking at the ladder on the ask side i can tell you it does not matter how far or fast it moves your basically going to be able to buy taht $6.50 strike back for $4.00 just look at the buy OTM offer prices (i know this is just an example) but what i am pointing out is what are you trying to do beyond simply know prices what is the system as it does not have to be as hard as your making it. We all like to make it hard but you need to focus on what is the system how to apply the binaries then work on the pricing (which when the other 2 pieces are done the 3rd will be much easier then where you are trying to go) - either way in the future we will have the upgrade including time on the simulator.

#7

oh i would not sell that 6.50. that would be stupid. however if i had sold that 36.50 and it goes to 50, there are a few things i have been doing with that 6.50 but i just can not calculate it yet. im going to look at the simulator and give it some more thought. thanks!