35 lines
2.1 KiB
Plaintext
35 lines
2.1 KiB
Plaintext
Chapter 37: How Volah'lity Affects Popular Strategies 763
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all, but the longer the life of the option, the more the other factors influence the
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"excess value."
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The five factors influencing excess value are:
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1. stock price movements,
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2. changes in implied volatility,
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3. the passage of time,
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4. changes in the dividend (if any exist), and
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5. changes in interest rates.
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Each is stated in terms of a movement or change; that is, these are not static
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things. In fact, to measure them one uses the "greeks": delta, vega, theta, (there is no
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"greek" for dividend change), and rho. Typically, the effect of a change in dividend or
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a change in interest rate is small (although a large dividend change or an interest rate
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change on a very long-term option can produce visible changes in the prices of
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options).
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If everything remains static, then time decay will eventually wipe out all of the
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excess value of an option. That's why it's called time value premium. But things don't
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ever remain static, and on a daily basis, time decay is small, so it is the remaining two
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factors that are most important.
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Example: XYZ is trading at 82 in late November. The January 80 call is trading at 8.
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Thus, the intrinsic value is 2 (82 minus 80) and the excess value is 6 (8 minus 2). If
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the stock is still at 82 at January expiration, the option will of course only be worth 2,
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and one will say that the 6 points of excess value that was lost was due to time decay.
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But on that day in late November, the other factors are much more dominant.
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On this particular day, the implied volatility of this option is just over 50%. One
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can determine that the call's greeks are:
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Delta: 0.60
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Vega: 0.13
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Theta: -0.06
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This means, for example, that time decay is only 6 cents per day. It would
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increase as time went by, but even with a day or so to go, theta would not increase
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above about 20 cents unless volatility increased or the stock moved closer to the
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strike price.
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From the above figures, one can see - and this should be intuitively appealing that
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the biggest factor influencing the price of the option is stock price movement (delta). |