111 lines
2.5 KiB
Plaintext
111 lines
2.5 KiB
Plaintext
154 • The Intelligent Option Investor
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One important thing to note is that although we are using the delta
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figure to get an idea of the probability that the market is assigning to a certain
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stock price outcome, we are also using deltas for options that nearly no one
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ever trades. Most option volume is centered around the 50-delta mark and a
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10 to 20 percentage point band around it (i.e., from 30- to 40-delta to 60- to
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70-delta). It is doubtful to me that these thinly traded options contain much
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real information about market projections of future stock prices.
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Another problem with using the deltas to get an idea about market
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projections is that we are limited in the length of time we can project out
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to only the number of strikes available. For this example, I chose an impor-
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tant tech company with a very liquid stock, so it has plenty of expirations
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and many strikes available so that we can get a granular look at deltas.
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However, what if we were looking at Mueller Water’s option chain and try-
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ing to figure out what the market is saying?
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2.5
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5
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7.5
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10
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Last
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C5.30
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C2.80
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0.55
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C0.00
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Change Bid Ask Impl. Bid Vol. Impl. Ask Vol. Delta AUG 16 ´13
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2.5
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5
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7.5
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10
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NOV 15 ´13
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2.5
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5
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7.5
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10
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12.5
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FEB 21 ´14
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DescriptionCall
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5.20 5.50 N/A 340.099% 0.9978
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0.9978
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0.7330
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0.1316
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0.9347
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0.8524
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0.6103
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0.1516
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0.9933
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0.9190
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0.6070
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0.2566
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0.1024
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142.171%
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46.039%
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76.652%
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N/A
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N/A
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2.95
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0.55
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0.10
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2.70
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0.500.00
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5.20 5.50
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3.00
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0.90
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0.20
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2.80
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0.80
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0.10
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5.505.10
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3.102.85
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1.151.05
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0.400.30
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0.200.05
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39.708%
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N/A
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N/A
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36.722%
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N/A
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38.754%
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38.318%
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39.127%
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36.347%
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36.336%
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163.282%
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75.219%
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42.610%
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45.215%
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122.894%
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64.543%
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42.697%
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44.728%
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50.218%
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C5.30
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C2.80
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C0.85
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C0.10
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C5.30
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C1.10
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C0.35
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C0.10
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3.00 +0.15
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Here you can see that we only have three expirations: 26, 117, and
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215 days from when these data were taken. In addition, there are hardly
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any strikes that are reasonably close to our crucial 84-delta, 50-delta, and
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16-delta strikes, which means that we have to do a lot of extrapolation to
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try to figure out where the market’s idea of the BSM cone lies.
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To get a better picture of what the market is saying, I recommend
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looking at options that are the most heavily traded and assuming that the
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implied volatility on these strikes gives true information about the mar -
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ket’s assumptions about the future price range of a stock. Using the im-
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plied volatility on heavily traded contracts as the true forward volatility
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expected by the market allows us to create a theoretical BSM cone that we |