Another Footprint
The customary way to measure the degree of an option’s over- or under-pricing is the implied volatility, which changes over time, but normally not dramatically in a short period.
Value Is In The Eye Of The Beholder
Many option traders are befuddled by the notion of “theoretical value.” The term “theoretical” is imposing, as are the calculations needed to derive the theoretical value.
The Delta Of An Option, Part II
You can use delta to estimate the value of the option at the new stock price. An at-the-money option typically has a delta of about 0.5, so suppose it
is exactly 0.5.
The Delta Of An Option
Just as an option has a price and a value, it has other characteristics that can be described numerically. One of the most important is the delta, one of the so-called “greeks.”
Footprints Of Inside Information
In the United States the use of inside information in the securities markets is no more legal than prostitution (strictly illegal in nearly every state), and probably no less prevalent.
OEX Calendar Spreads
OEX options are almost always overpriced. A OEX option calendar spread is certainly in principle vulnerable to a collapse in the OEX implied volatility (the VIX) to the level of the historical volatility, but such an event does not seem to occur.
Calendar Spreads
Calendar spreads are stability spreads, meaning that they profit most when the underlying is stable and lose when the underlying becomes very volatile. The profit profile for a calendar spreads looks like a tent, or an inverted “V.”
Value Trading
I am often asked questions like: “Should I buy out-of-the-money options or in-the-money options?”
Morphing a Calendar Spread
If you have a good toolbox of strategies and can remain flexible, you can “morph” one position into another good position in a fluid way.
Calendar Spreads And Implied Volatility
It is wiser to look for calendar spreads where you might expect the implied volatility to increase, which is to say, among the underpriced options where the implied volatility is known to be low.
Time Decay And Selling Premium
Options decay with time in a natural way.
Implied Volatility Changes
Sometimes when a trader seeks to exploit a stock’s expected price decline and sells an overpriced call, the underlying declines as expected but the option price does not.