Minyan Mailbag - Option Pricing
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Option pricing question. I've been trading the Goldman Sachs (GS:NYSE) Sept 90 puts. Even though the stock is down nicely over the last three days, the im vols and the delta have dropped. The IV has gone from 23 to 17 even though the VXO is up and the delta has dropped from 54 yesterday when the stock was a buck higher to a current level of 46. What am I missing here? By comparison, my Lehman (LEH:NYSE) Sept 75 puts have been great over the time frame.
This is typical and is called "riding down the skew". The calls have gone from in the money to out of the money. The skew dictates that out of the money calls trade at lower implied volatilities than in the money calls (although irrational in my opinion).
Without a volatile move in getting there (and the move has not been that volatile), the market makers who have been short these options have been able to re-hedge (sell stock) without much difficulty. They will not bid up the relative price of the options in an effort to "get out and cut losses". They are actually waiting for you to panic and sell them cheaply. This is the subjectivity (art) of trading options.
As long as you can capture the current price in volatility terms the best way to approach this is to wait for a move in a day (over 1.5% which equates to a 20% implied volatility move). The more moves like this, the more market makers will then want to "get out" and bid up the relative price.
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