do most option buyers do the greeks calculations etc..

N

noob_trad3r

Going through my learning process one of the things I noticed overall is how expensive options seem lately.

ie: lets say an call option for stock X, strike price 45 sells for 2.50 a share.

stock is trading at 40 today, and the option expires in 30 days.

That means the option has only time value of 2.50 for 30 days.

but even if the stock was selling at 46 dollars a share before expiration the time value might only be like 5 cents and the intrinsic value 1 dollar. from my understanding. so for the buyer it is a losing trade.

I have notice this, it seems options are super expensive.

like SPY march put with a strike price of 76 is selling for 1.89 per share.

so SPY would have to plummet past 76 dollars within 38 days.

Is it just me or does 1.89 sounds like a lot of money to pay for an march SPY put? It is over 7 dollars out.
 
Noob,

Welcome to the current market! The fact that options are so expensive right now is a direct connection to the general fear in the market. Puts and Calls get more expensive because nervous shareholders buy up puts, and bullish investors who want to leverage what they consider to be underpriced stocks buy calls.

If you look at a chart of the VIX, you will see that while off it's highs of late last year, it is still quite high compared to where it usually was say the last 5 years. If you were to go back in time to when the VIX was 20 for example, you would probably be quite surprised how low options appeared to cost (compared to now).

In an example such as X, the options are quite expensive if X doesn't move all that much - on the other hand there are those on either side of the fence who will either claim it's heading to 10 or heading to 100. If it hits either of those by a certain expiry, the appropriate options would have been a bargain.

JJacksET4
 
Quote from noob_trad3r:

Going through my learning process one of the things I noticed overall is how expensive options seem lately.
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To answer tour question: No, most beginners have no idea what the grees are and do not use them.

That's a habit that's difficult to break.

Learning to use the greeks at the same time you learn to use options is a good idea.

Using the greeks allows you to get a handle on the risk (and possible rewards) of an option position. They are not gospel. They seldom predict exactly how options behave. But they are helpful

Mark
 
Why do you think a price of 78 bucks for SPY is a plummet? The 52 week low is 74.34, and with all the volatility we've been seeing, 78 isn't crazy at all. Thats like a 2 day move in this market.

I'm not making any claim about whether vol is too high or too low right now, I'm just saying that your frame of reference is off.
 
Quote from noob_trad3r:

...so SPY would have to plummet past 76 dollars within 38 days.
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SPY is currently moving approximately $3 per day. A directional move lasting no more than 2 days essentially puts your strike ATM. Not really clear how a claim that the option is "expensive" can be justified. If anything, there is a defensible argument that it's too cheap.

Cheers.
 
Quote from WindyCityEagle:

Why do you think a price of 78 bucks for SPY is a plummet? The 52 week low is 74.34, and with all the volatility we've been seeing, 78 isn't crazy at all. Thats like a 2 day move in this market.

I'm not making any claim about whether vol is too high or too low right now, I'm just saying that your frame of reference is off.
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Its 76 the strike price I was looking at. You are correct, S&P at 760 is a possibility within 38 days.

Anything can happen in 38 days. But its would be on the outliers on a bellcurve.

I like this stuff its interesting.

Okay so maybe I am doing this wrong. For the march 76 put it last closed at 1.94 so if you paid that. (SPY closed at 83.60)

But according to my calculation.

The time value eroding 5 cents every day (Theta -0.523)

Thats a lot of nickels

Lets say SPY is down all the way to 78 20 days later 8 days remaining on the option

and I add 10% extra fear factor (Volatility)

your option would be worth 1.72 but now theta is (-0.15) losing 15 cents a day. Even more nickels


Boom SPY crashes to 75, 2 days left on the contract

now its worth 1.84 you still having a losing trade but its 1 dollar in the money technically.

1 day later its only worth 1.48 a contract.

Anyhow I was playing around with the pricing tool. Interesting to experiment with scenarios.

But it really paints a picture on how this stuff works out.
 
Quote from Random.Capital:

SPY is currently moving approximately $3 per day. A directional move lasting no more than 2 days essentially puts your strike ATM. Not really clear how a claim that the option is "expensive" can be justified. If anything, there is a defensible argument that it's too cheap.

Cheers.
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because if SPY goes to 75 today you have all that time value left. You can sell the put though and profit.

it would go to 5.01 dollars according to my calculation if I keep volatility at 46.95.

But do you think SPY is going to be 75 on thursday? Is it worth paying 1.94 today?

If its not you lost 5 cents of time value and every day you are losing 5 cents of time value then worse (10 then 15 cents etc..) that your gamble is not panning out.

sounds like an expensive lottery ticket. I guess if you want to bet 194 dollars but that is a lot of risk to try and make potentially 307 dollars. even if I stick 20% extra volatility (66.95) with SPY trading at 75 thursday

you could sell it at 695 dollars (695-194 = 501 bucks winning)

but if I was the casino I would suspect the house edge would be for the guy selling you the lotto ticket at 194 dollars.

Also it seems that a lot of the news has SPY priced in.

76 would probably require some real bad news worse than what we heard lately. And maybe the volatility might decrease once all this news stuff pans out a little which would hurt the price of the put.
 
Quote from noob_trad3r:

it would go to 5.01 dollars according to my calculation if I keep volatility at 46.95...
I guess if you want to bet 194 dollars but that is a lot of risk to try and make potentially 307 dollars
.
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If you believe that buying this option gives you the chance to make $307 you really must learn more about options before you even think about using real money.

The <i>potential</i> profit is not $307. It's many, many, many times that amount.

Do you truly believe you can predict SPY is going down - and by a specific amount - over a specific period of time? If you can do that, you don't need ET. You need to find a place to put your (soon to be yours) billions of dollars.

Mark
 
Quote from dagnyt:

If you believe that buying this option gives you the chance to make $307 you really must learn more about options before you even think about using real money.

The <i>potential</i> profit is not $307. It's many, many, many times that amount.

Do you truly believe you can predict SPY is going down - and by a specific amount - over a specific period of time? If you can do that, you don't need ET. You need to find a place to put your (soon to be yours) billions of dollars.

Mark
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I cant predict what SPY is going to trade at, just make a best effort guesstimate try to look at everything and make a best effort.

But yes I guess the amount could be many times that.

I threw in some numbers that says this put could be worth 36 dollars a share thursday afternoon.

1 contract you bet 194 dollars and tomorrow its worth

3600 dollars.

SPY at 75 thursday seems unlikely but it can happen SPY at 90 seems unlikely but it can happen. It could happen. SPY might end up 30 on thursday. Russia declares war on the US etc.. Thursday. You win 4600 dollars :) for 1 bet of 194 dollars on wed.

But at that point I would be most concenred about looking for a fallout shelter :)

After WWIII SPY trading at 1 dollar

Theortical value 75 dollars a share. (Volatility 5) no market, everyone standing on the street corner handing out certificates.

Anyhow my guesstimate is that contract will expire worthless march out of the money. Just a guesstimate as best as to my abilities.
 
"Going through my learning process one of the things I noticed overall is how expensive options seem lately."


The pricing model consists of some factual information and some subjective information. Time to expiration, price of the underlying for example are factual. The subjective or theoretical is Implied Volatility. Subjective because the implied volatility figure calculated into the price of an option may or may not materialize.

The terms "cheap" or "expensive" is also subjective. Ask anyone who bought a put on Citi or any of the big banks for example when the VIX was in the mid 40's (historically a higher than normal level of volatility) back in September of 08 and later sold the put when the VIX printed in the 80's...

They can make a pretty good argument that they purchased a "cheap" option. It's really in the eye of the beholder.
 
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