33 lines
1.8 KiB
Plaintext
33 lines
1.8 KiB
Plaintext
Finding Mispriced Options • 155
|
||
can extend indefinitely into the future and that is probably a lot closer to
|
||
representing actual market expectations for the forward volatility (and, by
|
||
extension, the range of future prices for a stock). Once we have this BSM
|
||
cone—with its high-low ranges spelled out for us—we can compare it with
|
||
the best- and worst-case valuations we derived as part of the company
|
||
analysis process.
|
||
Let’s look at this process in the next section, where I spell out, step by
|
||
step, how to compare an intelligent valuation range with that implied by
|
||
the option market.
|
||
Note: Data used for Oracle graphing example:
|
||
Expiration Date Lower Middle Upper
|
||
7/25/2013 29.10 31.86 32.75
|
||
8/16/2013 22.00 32.00 33.50
|
||
9/20/2013 19.00 32.00 35.00
|
||
12/20/2013 20.00 32.50 37.00
|
||
1/17/2014 19.00 32.50 37.20
|
||
1/16/2015 23.00 32.30 42.00
|
||
Here I have eyeballed (and sometimes done a quick extrapolation) to try
|
||
to get the price that is closest to the 84-delta, 50-delta, and 16-delta marks,
|
||
respectively. Of course, you could calculate these more carefully and get
|
||
exact numbers, but the point of this is to get a general idea of how likely the
|
||
market thinks a particular future stock price is going to be.
|
||
Comparing an Intelligent Valuation
|
||
Range with a BSM Range
|
||
The point of this book is to teach you how to be an intelligent option investor
|
||
and not how to do stochastic calculus or how to program a computer to
|
||
calculate the BSM. As such, I’m not going to explain how to mathematically
|
||
derive the BSM cone. Instead, on my website I have an application that will
|
||
allow you to plug in a few numbers and create a graphic representation of a
|
||
BSM cone and carry out the comparison process described in this section.
|
||
The only thing you need to know is what numbers to plug into this web
|
||
application! |