20 lines
1.4 KiB
Plaintext
20 lines
1.4 KiB
Plaintext
Vega
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Over the past decade or so, computers have revolutionized option trading.
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Options traded through an online broker are filled faster than you can say,
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“Oops! I meant to click on puts.” Now trading is facilitated almost entirely
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online by professional and retail traders alike. Market and trading
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information is disseminated worldwide in subseconds, making markets all
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the more efficient. And the tools now available to the common retail trader
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are very powerful as well. Many online brokers and other web sites offer
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high-powered tools like screeners, which allow traders to sift through
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thousands of options to find those that fit certain parameters.
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Using a screener to find ATM calls on same-priced stocks—say, stocks
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trading at $40 a share—can yield a result worth talking about here. One $40
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stock can have a 40-strike call trading at around 0.50, while a different $40
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stock can have a 40 call with the same time to expiration trading at more
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like 2.00. Why? The model doesn’t know the name of the company, what
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industry it’s in, or what its price-to-earnings ratio is. It is a mathematical
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equation with six inputs. If five of the inputs—the stock price, strike price,
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time to expiration, interest rate, and dividends—are identical for two
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different options but they’re trading at different prices, the difference must
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be the sixth variable, which is volatility. |