Mommy, where do options come from?
Posted: May 8th, 2008, 4:30 pm
I want to know the things my classes don't teach me about options.Where do they come from? If I buy an option through eTrade and make $10, where did the $10 ultimately come from?I assume eTrade buys options from somebody (I'll call him "Mr. X") and sells them to me, but who is Mr. X? And if so, that means the price of the option I just bought includes a little chunk for eTrade and a little chunk for Mr. X. When I compute an option price using the BSF, did I just compute the fair value of the option without eTrade's cut? Or is it the fair value of the option without both eTrade's and Mr. X's cut?What kinds of people and institutions are on the other end of the option?So if I wanted to buy an option on Intel, I *think* there are many many people selling them: some sell to brokers like eTrade, and some sell them to individuals like me (I think). Since there are many ways to compute volatility, and many people don't use the exact form of the BSF that they teach in my classes, there must be many notions of what a fair value is for an option. There isn't even a unique risk free rate.So when I look at a page like this:http://finance.yahoo.com/q/op?s=GOOGWho is doing the bidding? Is it eTrade? Me? My broker at Smith Barney?And who is doing the asking? Mr. X? eTrade? My broker at Smith Barney?And if there are many notions of what the fair value is, of what use is this finance.yahoo.com page? Is it just a vague general guideline?Where would I go to learn more about the mechanics and details of options?Thanks!