There has consequently been a flurry of activity in the stock's long term out of the money puts. The implied volatility of the 15 strike options has risen from the mid 40% range to the high 70% range as the buyers seek liquidity. As over-writers (long term holders of stock who periodically sell calls to generate premium) watch the market bid up the option prices, they begin to sell out of the money calls. Enter me. I sell the out of the money puts to the buyers of protection at a 77% implied volatility (and short stock to hedge the delta) and buy the out of the money 40 strike calls from the over-writers at a 44% implied volatility (and again short stock to hedge the delta). This discrepancy in price is how I make my money; the risks associated with the trade must be constantly managed.
A ripple in one market affects all other markets, especially the derivatives market.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter