41 lines
2.7 KiB
Plaintext
41 lines
2.7 KiB
Plaintext
Finding Mispriced Options • 157
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to eyeball the ATM volatility for the one- and two-month contracts.
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3. If there is a large bid-ask spread, the relevant forward volatility
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to use is equal to the implied volatility we want to transact. In
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other words, use the ask implied volatility if you are thinking
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about gaining exposure and the bid implied volatility if you are
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thinking about accepting exposure (the online application shows
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cones for both the bid implied volatility and the ask implied
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volatility).
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Basically, these rules are just saying, “If you want to know what the
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option market is expecting the future price range of a stock to be, find a
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nice, liquid near ATM strike’s implied volatility and use that. ” Most op-
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tion trading is done in a tight band around the present ATM mark and for
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expirations from zero to three months out. By looking at the most heavily
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traded implied volatility numbers, we are using the market’s price-discov-
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ery function to the fullest. Big announcements sometimes can throw off
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the true volatility picture, which is why we try to avoid gathering infor -
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mation from options in these cases (e.g., legal decisions, Food and Drug
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Administration trial decisions, particularly impactful quarterly earnings
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announcements, and so on).
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If I was looking at Oracle, I would probably choose the $32-strike
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options expiring in September. These are the 50-delta options with
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61 days to expiration, and there is not much of a difference between
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calls and puts or between the bid and ask. The August expiration op-
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tions look a bit suspicious to me considering that their implied volatility
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is a couple of percentage points below that of the others. It probably
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doesn’t make a big difference which you use, though. We are trying to
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find opportunities that are severely mispriced, not trying to split hairs
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of a couple of percentage points. All things considered, I would prob-
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ably use a number somewhere around 22 percent for Oracle’s forward
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volatility.
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C12.02 11.75 N/A 55.427% 0.9897 C0.00 0.02 N/A 50.831%- 0.01032011.90
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C11.03 10.70 N/A 123.903% 0.9869 C0.01 0.03 N/A 48.233%- 0.01312112.35
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C10.04 9.50 N/A 64.054% 0.9834 C0.03 0.05 37.572% 46.993%- 0.01660.012210.10
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C0.06 0.04 20.455% 21.147% 0.0463 C5.03 5.55 N/A 36.111%- 0.95584.95370.05
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1.65 1.65 22.720% 23.311% 0.6325 0.84 +0.07 0.82 22.989% 23.384%- 0.36790.80311.68-0.13
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1.06 1.08 22.019% 22.407% 0.4997 1.23 +0.05 1.25 22.284% 22.672%- 0.50081.23321.10-0.12
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0.66 0.65 21.378% 21.813% 0.3606 1.88 +0.16 1.82 21.453% 22.106%- 0.64021.79330.67-0.07
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0.02 0.01 21.354% 23.409% 0.0155 C6.99 7.55 N/A 44.342%- 0.98716.85390.02+0.01
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0.03 0.01 19.050% 22.144% 0.0266 C6.00 6.30 17.134% 30.947%- 0.97576.15380.030.00
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