Option Price Calculation Model

[NKU]

Hello,

If my understanding is correct, option prices on IG are not taken from an exhange, but rather they are computed using a variant of Black-Scholes. Does anybody have details on how exactly IG is using this model to compute prices? I am assuming they are computing volatility from the past data and use that as an input to the BS formula for IV, but does anyone know how exactly are they calculating (implied) volatility?

The reason I am asking is, I want to backtest some daily option strategies and I need historical options data from IG. Unfortunately it is very difficult (sometimes near impossible) to pull historical options chain from IG API. Especially the naming convention of epics for daily options is very confusing. Hence I thought that instead of pulling historical option data I can simply compute them using IG's model for my backtests. 

Thanks!

 

 

 

[gezmond]

I trade options with Ig as well as option broker platforms and the Ig prices are similar (but with a wider spread instead of commissions)

[NKU]

Yes for weekly and monthly options IG's prices are very similar to options traded elsewhere. However, most of their daily options do not exist anywhere else, hence it is impossible to obtain/purchase that data from some other resource. 

[AhmedMarsh]

Option prices on IG are indeed calculated using the Black-Scholes model. They use historical data to estimate volatility and then apply the Black-Scholes formula to calculate prices. But the exact details of this process are not always published.

[TheGuru12]

They should be from the market. One would hope anyway. 

[NKU]

On 01/04/2024 at 18:26, AhmedMarsh said:

Option prices on IG are indeed calculated using the Black-Scholes model. They use historical data to estimate volatility and then apply the Black-Scholes formula to calculate prices. But the exact details of this process are not always published.

Yes, I asked them and indeed I was told that they use historical data + the order book to estimate IV, which is in turn converted to option prices using Black-Scholes. However they wouldn't share their exact estimation method. That is too bad, because it is impossible to obtain historical data for daily options from IG API. I was hoping that if I understood their approach I would be able to re-create their historical option prices, but that is a no-go as well.. This is all too bad, because as far as I know IG is the only place where you can do daily options trading on a wide range of products, it would have been great to have some data to backtest strategies. 

On 01/04/2024 at 18:53, TheGuru12 said:

They should be from the market. One would hope anyway. 

Yes their longer term options (weekly and mothlies) are indeed lifted from the market, they just apply their spread to it. However the daily options are IG's own synthetic products, you can't find them anywhere else. 

[KoketsoIG]

19 hours ago, NKU said:

Yes, I asked them and indeed I was told that they use historical data + the order book to estimate IV, which is in turn converted to option prices using Black-Scholes. However they wouldn't share their exact estimation method. That is too bad, because it is impossible to obtain historical data for daily options from IG API. I was hoping that if I understood their approach I would be able to re-create their historical option prices, but that is a no-go as well.. This is all too bad, because as far as I know IG is the only place where you can do daily options trading on a wide range of products, it would have been great to have some data to backtest strategies. 

Yes their longer term options (weekly and mothlies) are indeed lifted from the market, they just apply their spread to it. However the daily options are IG's own synthetic products, you can't find them anywhere else. 

Dear @NKU,

Thank you for the response, this is the way we price options.

Thanks,

KoketsoIG