28 lines
1.2 KiB
Plaintext
28 lines
1.2 KiB
Plaintext
70 • The Intelligent Option Investor
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We, of course, know that it is worth less because after the announce-
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ment, there is only the smallest sliver of the call’s range of exposure con-
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tained within the BSM cone.
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Volatility Rise Fails to Offset Inaccurate Directional Prediction
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Let’s say that we are bullish on the Antelope Bicycle Co. (ABC) and, noting
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that the volatility looks “cheap, ” buy call options on the shares. In this case,
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an investor would be expecting to make money on both the stock price and
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the implied volatility increasing—a situation that would indeed create an
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amplification of investor profits.
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We buy a 10 percent OTM call on ABC that expires in 60 days when
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the stock is trading for $50.
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20
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25
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30
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35
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40Stock Price 45
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50
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55
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Antelope Bicycle Corp. (ABC)
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60
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GREEN
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The next morning, while checking our e-mail and stock alerts, we find
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that ABC has been using a metal alloy in its crankshafts that spontaneously
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combusts after a certain number of cranks. This process has led to severe
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burn injuries to some of ABC’s riders, and the possibility of a class-action
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lawsuit is high. The market opens, and ABC’s shares crash by 10 percent. At
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the same time, the volatility on the options skyrocket from 15 to 35 percent |