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This is all very nice but there is no mention as to the prices (ie implied volatilities) of the options bought and sold. This is like saying "Okay here's my strategy. I close my eyes and blindly buy 5 shares of XYZ and sell 5 shares of ABC. Then I buy 10 shares of DEF and sell 10 shares of...

Right. Cost of carry is interest rate minus dividends.

If you're buying calls for, say, Jan 2011, keep in mind that the underlying is not $38. The current contango in crude is the steepest in history, and the Jan 2011 futures are trading around $60 a barrel. So if you buy a $60 call, you're not going to pay far OTM prices, you're going to pay ATM...

Volatility correlates with the median range. If you multiply volatility x .675 you will get the median range. Example: daily volatility is 4%. That means that 68.3% of the time, daily movement will be less than 4% up or down (assuming a normal distribution). 4% x .675 = 2.7%. So 50%...

The current VIX calculation uses calendar days to expiration, not trading days to expiration. So I think you would use sqrt(365) rather than sqrt(252). I can see a rationale for both ways but on balance, if we're using calendar days I would stick with calendar days throughout.

By that logic, buying lottery tickets is a sure winner. Tens of millions of dollars upside, $1 downside. But despite the attractive appearance, lottery tickets are overpriced and so lottery ticket buyers as a class lose money. Whatever the bet may be - an option, a lottery ticket, or...

Take a look at this and see if it's what you're looking for: http://hoadley.net/options/strategymodel.htm

Well, I think I wrote that last August. Overall since then, you must admit that choice of books for would-be premium sellers has proven quite useful!

The March 09 110 calls are only worth about .60. If you buy the SPY you can sell the calls if you want and you've got a conversion (long the 110 puts, long the stock, short the 110 calls). At that point everything's locked in. Or if you're bullish you can buy the SPY but NOT sell any calls...

You can also lock in profits by buying SPY itself.

Wow Wayne, thanks for taking the trouble to post all that. I'm surprised it's so complicated - I would've thought some simple Excel function would do it. Apparently not.

Right - this is precisely correct for a normal distribution. If the OP is interested in the precise answer for options, he'll need to take into account the fact that option pricing is based on a lognormal distribution, which factors in the fact that the underlying can go up to infinity but can...

Ha ha - you're dating yourself King! I wonder how many reading this never heard of a mimeograph - much less remember that lovely carcinogenic smell.

I wonder if the problem is DDE, which is ancient and horrible. Hoadley has a much-improved way of bringing data into Excel - and it works with IB. It is certainly more user-friendly than DDE, as it doesn't use DDE-style hard coding. That is particularly true for option traders, who end up...

Good point. It wouldn't make sense for a broker to err on the side of pessimism when creating algorithms for their simulators, would it? Something to keep in mind.

Your calculations look about right - again, they'd be somewhat more precise if you incorporated the lognormal distribution, although I can't tell you offhand how to do that. As for a reference book - I'm quite sure Natenberg covers this in one of his volatility chapters. Of course, the...

The IV of 40% implies a one-standard-deviation move of 40 in a year's time if the underlying stock is at 100. In other words, there is a 68.3% chance that a year from now the stock will be trading no more than 40 higher or lower (actually the fact that option pricing is based on a lognormal...

I think we'll have to invent some vocabulary, as we're getting into concepts that are pretty interesting though not often discussed. Shall we call it the "positive/negative vomma threshold?" I assume that's the threshold you're talking about. No, I don't know how to calculate it. I'd be...

Yes, if you jack up volatility and time remaining enough, your scenario could happen. But raising time and volatility like that also vastly expands the number of strikes that are "at the money" in the sense that a rise in volatility decreases their gammas. I think you'll find that however...

It's true that even if cost of carry is zero, ATM options do not have a delta of exactly 0.5, due to the lognormal distribution. But for purposes of the discussion in this thread, an option with volatility of .5 is ATM and behaves like an ATM in that its gamma drops when IV rises. Under most...