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Options pricing close to maturity is just gambling?

DoubleTrouble

DoubleTrouble

Joined
7/19/11
Messages
38
Points
18
I have heard from several sources that it is pretty much consensus that the last two weeks before maturity is more or less gambling. And as of today, there is no way to model this sufficiently well. I would like to hear what you guys here at Quantnet have to say about that. It would be excellent to hear from someone who has worked as a quant and see what they have to say about this matter. Or if you know of any article that discusses this.

Personally I haven't enough market experience to draw any conclusions. But in the market data that I have studied (2 month European index options) I could see clear pattern of greater variance in the volatility in the last 2 weeks before maturity. It's like the market get more nervous close to maturity.

Looking forward to your inputs on this!

/DT
 
As t -> T, Delta of ITM option close to 1 (Call), -1 (Put). So, higher volatility as you observe.
 
DoubleTrouble said:
I have heard from several sources that it is pretty much consensus that the last two weeks before maturity is more or less gambling. And as of today, there is no way to model this sufficiently well. I would like to hear what you guys here at Quantnet have to say about that. It would be excellent to hear from someone who has worked as a quant and see what they have to say about this matter. Or if you know of any article that discusses this.

Personally I haven't enough market experience to draw any conclusions. But in the market data that I have studied (2 month European index options) I could see clear pattern of greater variance in the volatility in the last 2 weeks before maturity. It's like the market get more nervous close to maturity.

Looking forward to your inputs on this!

/DT
Click to expand...

i dont know much about index options, but pricing short dated options is not gambling. for vanilla options, pricing is straightforward. for barrier options less than 1wk you can find some odd results that results from time weighting issues. but a legitimate trading desk will get these issues sorted out and have workable solutions - i.e. they don't gamble. for options which take fixing sources, there is a large amount of sampling error in the short dates which cannot be priced in (like for volswaps), and so you'll find that desks will either not quote them or make them very wide.
 
They are wide as mentioned. The uncertainty is greater if you are close to the money. It's interesting what happens to the options not close. Anybody knows?

Nobody gambles. It's true. Not knowingly.;)
 
Yes. I'm sort of curious what the difference between bid and ask is in relative terms with the understanding that both are close to zero.
 
finengtoo said:
Yes. I'm sort of curious what the difference between bid and ask is in relative terms with the understanding that both are close to zero.
Click to expand...

Bid-Ask spread resembles Vega in each strike. It's especially obvious in far month options.

So when near maturity, OTM Vega is close to zero, bid-ask spread becomes very tiny.
 
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