33 lines
1.4 KiB
Plaintext
33 lines
1.4 KiB
Plaintext
152 • The Intelligent Option Investor
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move randomly, which the BSM does—is the price level at which there is
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an equal chance of the actual future stock price to be above or below. In
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other words, the 50-delta mark represents the forward price of a stock in
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our BSM cones.
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Recall now also that each line demarcating the cone represents roughly a
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16 percent probability of the stock reaching that price at a particular time in the
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future. This means that if we find the call strike prices that have deltas closest to
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0.16 and 0.84 (= 1.00 − 0.16) or the put strike prices that have deltas closest to
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−0.84 and −0.16 for each expiration, we can sketch out the BSM cone at points
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in the future (the data I used to derive this graph are listed in tabular format at
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the end of this section).
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6/21/201612/24/20156/27/201512/29/20147/2/20141/3/20147/7/20131/8/20137/12/2012
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Date
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Oracle (ORCL)
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Price per Share
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45
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40
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35
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30
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25
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20
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5
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10
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15
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-
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Obviously, the bottom range looks completely distended compared
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with the nice, smooth BSM cone shown in earlier chapters. This dis-
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tension is simply another way of viewing the volatility smile. Like the
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volatility smile, the distended BSM cone represents an attempt by partici-
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pants in the options market to make the BSM more usable in real situa-
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tions, where stocks really can and do fall heavily even though the efficient
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market hypothesis (EMH) says that they should not. The shape is saying, |