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.
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.
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.
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.”
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 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 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.”
Last week, we talked about the importance of trading markets that move in fairly large ranges. Today we will look at adjusting your stops to reflect added volatility.
I am often asked questions like: “Should I buy out-of-the-money options or in-the-money options?”
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.