Bob Pisani
Submitted by rein:
Bob, do you know of any intraday source for option volume alerts and increased IV?
Bob Pisani:
No, I don’t. If you want this kind of thing, you really should have a real time data feed and some professional software.
Submitted by vette427:
With options on QQQ available, would you suggest trading these or is the OEX still better because of liquidity? Or will the mm’s be more favorable in the QQQ options?
Bob Pisani:
My guess is, stick with the OEX for awhile.
Submitted by traderx21:
If a stock or future is in a sharp uptrend, doesn’t that increase the value of the calls and decrease the value of the puts?
Bob Pisani:
You would think so. But the model most traders use for options does not consider trends. It is essentially an arbitrage model and presumes that the future market action is, whatever the past and present, inscrutable. If however you have reason to believe that the underlying will continue its strong uptrend, then certainly the calls are worth more and puts are worth less.
Submitted by murphymb:
I noticed you figure over/undervaluation using 100 days of Historical Volitility compared to Implied. Why 100 days? How many days do you use when figuring the Implied Volatility?
Bob Pisani:
100 is a nice round number, and the estimate you get from 100 days iws statistically pretty accurate, but there is no magic number. And there are other kinds of analyses that you can do that will tell you more than the 100-day H.V. Implied volatility is derived using only the option price today — you don’t need a history for that.
Submitted by Johna:
Bob: how can you measure future volatility?
Bob Pisani:
You can’t measure the future, of course, but you can look at the past and use the past as a guideline. A natural thing to do is to take a certain number of days from the recent past — we use 100 — and measure the volatility over that period and use that as an estimate of what the future will be like. But there are other methods also, and there are certainly cases where this method is weak.
Submitted by PlayToWin:
Have you found on average that a stock option that is X strikes out of the money has had a better return than another with a realistic chance of that return? What time frame on an option do you use?
Bob Pisani:
I’m not sure what you mean. Very ootm options can show a tremendous return, of course. For instance, they can easily double. But that doesn’t mean they are good bets. As far as time frame, I avoid options that will expire within a week, and in general let the values tell me when to close out a position. If there is no more edge in a position, there is no point in holding it.
Submitted by Moderator:
Welcome to the tradingmarkets.COM Live Forum, featuring Bob Pisani.
After receiving a Ph.D. in statistics from the University of California at Berkeley in 1971, Bob Pisani joined the faculty of that institution, conducting extensive research on the securities and options markets, and co-authoring a college statistics textbook that has been a top-seller for over 20 years. Bob’s research on the markets led to the development of sophisticated mathematical options models and trading strategies that at the time could only be traded “on paper” because organized options markets did no yet exist. That all changed in 1975 when listed options first became available for trading on the Chicago Board Options Exchange (CBOE) and the Pacific Coast Stock Exchange (PSE). Taking advantage of the opportunity to apply his strategies in real markets, Bob founded a market maker firm, Galton-Gauss Securities, that traded on the Chicago Board Options Exchange (CBOE) and the Pacific Coast Stock Exchange (PSE) with the express purpose of “achieving extraordinary gains.” Using Bob’s proprietary option trading models, Galton-Gauss did just that for the next half-dozen years. Bob has continued to trade as well as research and test successful options trading models. He also is a visiting scholar at the University of California at Berkeley. You can access his options indicators (updated nightly) and commentary (every Tuesday and Thursday) through the “Option Traders” section of tradingmarkets.COM. Today, Bob will start the forum discussing underpriced options–how to identify them and how to trade them. To ask a question, simply type it in and hit the “Submit Question” bar–that’s all there is to it. You also can create a short subject heading for your question in the title space (it helps if you do). Past questions appear in the left-hand portion of your screen for easy browsing. This is a moderated forum, so we ask that you respect the other guests and our featured speaker. We try to get as many questions as we can, so please be patient. Shortly after the forum is completed, it will be archived and available for review.
Submitted by Philr:
If I felt that options on a particular stock/futures were underpriced, but I was unsure of the future direction of the market, what would you suggest as a simple option strategy? How far from expiration should I put on a trade like this?
Bob Pisani:
You should explore delta neutral strategies, but if you want a simple answer you could look for a straddle to buy. I assume that you are using a model to determine that the options are underpriced. As far as time to expiration, a general rule is, stay away during the last week. A trade may need time to work out.
Submitted by Johna:
Bob, do you know if floor traders tend to favor certain kinds of spreads or option trades?
Bob Pisani:
There are market makers who specialize in any given type of spread, and the brokers know to go to them with such orders. Many market makers like backspreads and try to build their positions in that way, but a market maker’s position is usually quite complex and contains many option series.
Submitted by vette427:
Will you be expanding your portion of tradingmarkets.com, such as OEX trade recommendations? Maybe with target support and resistance?
Bob Pisani:
We will definitely be expanding the site. The direction is not yet clear, as I am trying to get a handle on the level of sophistication of the audience. I am looking for suggestions, so please feel free to make them.
Submitted by jagell:
Have you found any particular option analysis programs to be more helpful than others?
Bob Pisani:
I like Option Simulator from Bay Options. It does everything a professional might want, and was written by a fellow who spent many years as an options market maker.
Submitted by Trial User:
Which are more profitable and reliable, stock or future options?
Bob Pisani:
I can’t really answer that question. You can do well with either, but your success is determined more by your understanding of options than anything else. As I mentioned, options are fairly technical, but it is an area where good technical understanding pays off.
Submitted by Moderator:
Submitted by murphymb:
Do you have a minimum liquidity threshold, and if so, does the option’s liquidity threshold you use depend on whether you are buying of selling?
Bob Pisani:
You certainly don’t want to build a position so large that you can’t unwind it without affecting the market. The Pisani 250 are the 250 most liquid option stocks, but even with some of them I would be careful. You will find very deep markets that can absorb very large orders only in the very major stocks.
Submitted by Moderator:
Bob, let’s start out with the basics. How do you determine an option’s value?
Bob Pisani:
You need to use software that evaluates properly. You don’t need to understand the algorithms used, but you need to know that they are correct. I think it helps to understand the algorithms, even roughly, and have an idea how these values are developed and why they are reasonable.
Submitted by (Trial User):
I’ve never traded options. When would it be better to trade options rather than just the underlying stock?
Bob Pisani:
Options are inherently a little technical, and you should get some education before going into that market. In some cases, it is better to buy or sell an option than the stock, but you have to understand a bit about options to know when this is true.
Submitted by vette427:
Is it better to purchase an option with a delta of 50 or better even if all the options above 50 delta’s are slightly overpriced?
Bob Pisani:
The rule is, buy underpriced options and sell overpriced options. The delta tells you how to structure your position so that is is market neutral, bullish or bearish. It is better to purchase and sell value and make certain that you are buying more value than you are giving away when you have to sell some. This gets into the area of spreads and their value, which is another topic.
Submitted by Philr:
Thanks for the response, Bob. I know what option delta is, but I’m not sure what “delta neutral” means. Could you briefly explain, or maybe give an example?
Bob Pisani:
Suppose a call option has a delta of 50. This means that this option behaves like 50 shares of the stock, or alternately two of these options give you a position that behaves like 100 shares of the stock. So if you buy two of these calls and sell 100 shares of the stock short, you will have a position that, at least locally, does not gain or lose value. That is delta neutral. The stock will probably move and the delta of the calls with change, and you will have to adjust the position in order to remain delta neutral, but the idea is that you are seeking to gain your edge not from forecasting the movement of the stock but rather from the underpricing of the calls (assuming they are underpriced).
Submitted by Moderator:
Do you think the option markets are tougher to get in edge in than they were 10-15 years ago? Have you changed your strategies (if the answer is yes)?
Bob Pisani:
No doubt about it. The technology has proliferated and it is now easy to gain access to complex models and strategies, and the options markets have definitely become more efficient.
Submitted by Moderator:
How can you improve your odds when buying an underpriced option?
Bob Pisani:
If you can simultaneously sell an overpriced option on the same underlying you will improve your odds. But this is rarely possible. This gets into the area of spreads, which I’ll be writing about in future commentaries.
Submitted by jackrek:
Bob: Do you do any technical analysis of the underlying market to aid in your option trading?
Bob Pisani:
Yes. This is fruitful territory. But the Black Scholes model does not consider such an analysis and you have to bring it in yourself.
Submitted by Moderator:
We’ll be closing the forum fairly soon. If you have any questions, submit them as soon as you can!
Submitted by kevind:
Is there any practical difference between the different option pricing models, or is the Black-Scholes as good as any to use?
Bob Pisani:
If you are a professional and running a market maker firm,you will probably want to explore some of the other models. If you are a trader, you probably won’t get much of an edge by looking at anything but the Black Scholes model.
Submitted by Moderator:
This concludes our Live Forum. Thanks for all your questions, and thanks also to our trader/host Bob Pisani. Come back next Thursday, April 1, for our next forum.
This forum will be archived shortly for easy review.
Submitted by Moderator:
If all the options on a stock or future are underpriced, how can you spread them against one another?
Bob Pisani:
The basic idea is, you buy those that very underpriced and as a hedge you sell those that are not as underpriced. The whole task of building a spread to meet your “risk parameters” is a little lengthy, but that is the general idea.
Submitted by timk1:
Bob, can you explain how the volatility of a stock or future affects an option’s value?
Bob Pisani:
An option on a stock or future which is very volatile is worth more than one on a stock or future that is very stable. This is true for both puts and calls. The idea is, the more volatility the more likely the underlying will move to a region where the option has intrinsic value.