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It's a worthwhile endeavor OP but I don't know what service does a good job of searching for steep skews. I can tell you a service that does a BAD job - ivolatility.com. They have something called their "advanced ranker" that purports to do exactly what you're looking for. Unfortunately, it...

Okay then, you're asking two different questions. First question: If goog is at 300 and you want to buy 300 puts for 20 and sell 300 calls at 30, that is indeed a put/call parity arbitrage and as I said above, you won't find such a thing. Second question: If goog is at 300 and you want...

Simple risk-free arbitrages such as the one you seem to be describing are not available to retail traders, and haven't been for many years. Read the thread "GM skew" for more details. The level of competition has advanced brutally since the halcyon days when money was just lying around free...

It's described in this post http://www.elitetrader.com/vb/showthread.php?s=&postid=2057096&highlight=mighty+sneaky+outfit+ib#post2057096 In fact, I highly recommend that you read through that thread, which chronicles the follies of a few of us "free lunch curious" folks who tried to take...

You have to choose different strikes, not as far out of the money as your targets, so that if the market makes it to one of your targets you'll make money. You'll just have to look at the different strikes and their prices and determine what strangle will produce your desired profit at your...

Sounds like you're back to buying a vanilla front-month strangle.

CP - you need to get hold of software that will model various scenarios so you have a solid understanding of how your position will act when this happens or that happens. You need to just sit there and play "what if" games until you've mastered it. This is a fairly complicated position to...

If you're trading options, I personally think it's important to have conceptual agility in understanding and visualizing how options work - how all the pieces of the puzzle fit together. Understanding put/call parity and synthetics (they go together) is an essential part of that. Without it...

No, just the opposite. The front month is the next-to-expire. The back months have longer expiration dates. So the December options are the front-month options. Options expiring next March are back-month options. So what I'm suggesting is, for example, buying options with, say, 40 days...

Buy front month options and sell back month options at a ratio that makes you vega neutral. You will end up long more front month options than you are short back month options, and on top of that, each front month option will have more gammas than each back month option (assuming your front and...

A few months ago it seemed like they were giving away money on Sears' reversals - you could lock in over 20%. Sears shares were hard to borrow, but there were some available at IB. So I did a few reversals just to see what would go wrong. Everything seemed perfect - until on a tip I dug...

Here's a link to a post in which I summarized some of the differences: http://www.elitetrader.com/vb/showthread.php?s=&postid=2047809&highlight=dmo+stock+futures+options#post2047809

The Whaley model is designed to evaluate American-style options, the Black-Scholes model is designed for European-style options. Under most circumstances you can use them interchangeably and the difference will be infinitesimal. The vast majority of retail traders could use any of the models...

Most of your numbers make sense to me Chisel, but if you're using a 1% volatility and getting call/put deltas of .53/-.47 - and interest rates are zero or close to zero - then something's wrong somewhere. Try that one again. Unfortunately the Montgomery Investment option calculator page isn't...

Lovely idea but alas, you're about 30 years too late. Simple risk-free arbitrages disappeared long, long ago. You need a lot more sophistication to win at options in today's environment - and more's the pity. Shows you're thinking though - keep plugging away!

Mark, it works a little differently in options on futures. I think what you're referring to is the fact that with equities, the interest rate you input is used by the model to calculate a forward price for the stock. The model then uses that forward price (and not the stock price that you...

Unfortunately I don't have the McMillan book so I can't look at his suggested formula, but I'll answer as much as I can. Yes, the whole thing breaks down close to expiration. So I would indeed forget the last week or ten days when calculating historical IV. Personally, I would calculate...

Now that I know your background I can tell you exactly where the confusion is coming from. I also traded T-bond options on the floor during the 80's and 90's, and I also used the Whaley model. The main thing to keep in mind is that the volatility we were dealing with was WAY lower than the...

You're on the right track - it is indeed the lognormal distribution that causes that effect. At 800, zero may seem too far away to make a difference. But with that much time remaining and volatility so high, 800 becomes more like 25 than you think. Play around with it and you'll see that's...

Let's say you've identified a stock you feel is a good buy. Now you want to figure out if you'd rather go long the stock or long calls on that stock. You've already determined that the stock is underpriced, and represents good value. Now you need to look at the "option dimension" of that...