Add training workflow, datasets, and runbook
This commit is contained in:
@@ -0,0 +1,36 @@
|
||||
106 Part II: Call Option Strategies
|
||||
such an analysis for themselves, the details of computing a stock's volatility and pre
|
||||
dicting the call prices are provided in Chapter 28 on mathematical techniques.
|
||||
OVERPRICED OR UNDERPRICED CALLS
|
||||
Formulae exist that are capable of predicting what a call should be selling for, based
|
||||
on the relationship of the stock price and the striking price, the time remaining to
|
||||
expiration, and the volatility of the underlying stock. These are useful, for example,
|
||||
in performing the second step in the foregoing analysis, estimating the call price after
|
||||
an advance in the underlying stock. In reality, a call's actual price may deviate some
|
||||
what from the price computed by the formula. If the call is actually selling for more
|
||||
than the "fair" ( computed) price, the call is said to be overvalued. An undervalued
|
||||
call is one that is actually trading at a price that is less than the "fair" price.
|
||||
If the calls are truly overpriced, there may be a strategy that can help reduce
|
||||
their cost while still preserving upside profit potential. This strategy, however,
|
||||
requires the addition of a put spread to the call purchase, so it is beyond the scope
|
||||
of the subject matter at the current time. It is described in Chapter 23 on spreads
|
||||
combining calls and puts.
|
||||
Generally, the amount by which a call is overvalued or undervalued may be only
|
||||
a small fraction of a point, such as 10 or 20 cents. In theory, the call buyer who pur
|
||||
chases an undervalued call has gained a slight advantage in that the call should return
|
||||
to its "fair" value. However, in practice, this information is most useful only to mar
|
||||
ket-makers or firm traders who pay little or no commissions for trading options. The
|
||||
general public cannot benefit directly from the knowledge that such a small discrep
|
||||
ancy exists, because of commission costs.
|
||||
One should not base his call buying decisions merely on the fact that a call is
|
||||
underpriced. It is small solace to the call buyer to find that he bought a "cheap" call
|
||||
that subsequently declined in price. The method of ranking calls for purchase that
|
||||
has been described does, in fact, give some slight benefit to underpriced calls.
|
||||
However, under the recommended method of analysis, a call will not automatically
|
||||
appear as an attractive purchase just because it is slightly undervalued.
|
||||
TIME VALUE PREMIUM IS A MISNOMER
|
||||
This is a topic that will be mentioned several times throughout the book, most
|
||||
notably in conjunction with volatility trading. It is introduced here because even the
|
||||
inexperienced option trader must understand that the portion of an option's price
|
||||
that is not intrinsic value - the part that we routinely call "time value premium" - is
|
||||
really composed of much more than just time value. Yes, time will eventually wear
|
||||
Reference in New Issue
Block a user