Finding underpriced options

[Neoxx]

In your experience, what have you found to be the most effective way of finding underpriced options?

How reliable is comparing current implied volatility to mean historical volatility?

Thanks,
Neoxx

 

[Maverick74]

Quote from Neoxx:

In your experience, what have you found to be the most effective way of finding underpriced options?

How reliable is comparing current implied volatility to mean historical volatility?

Thanks,
Neoxx

Historical volatility is a terrible way to guage how cheap or expensive implied volatility is. Implieds lead the historical vols. It's useless.

 

[zxcv1fu]

Do not waste your time for this. All options are price correctly. If they are cheap, may be they have low chance to move.

 

[Neoxx]

Historical volatility is a terrible way to guage how cheap or expensive implied volatility is. Implieds lead the historical vols. It's useless.

How should you guage the value, and how can you find underpriced options?

 

[Maverick74]

Quote from Neoxx:

How should you guage the value, and how can you find underpriced options?

Why exactly are you trying to find undervalued call options?

 

[riskarb]

Quote an IV column based upon the midpoint of the bid/offer. Many off the shelf apps like OptionVue or Microhedge will do, or simply quote it in excel.

Use the atm combo vol as the vol for pricing vol skew and under/overpriced values.

 

[Neoxx]

Quote from Maverick74:

Why exactly are you trying to find undervalued call options?

I realise the internet's not the most reliable source for information but I read this on www.thepitmaster.com

Buying underpriced options gives you four advantages:

1) It shifts the probabilities in your favor. When an option's premium is equal to the fair value, no one has an advantage. But when you buy an option with a premium that is less than the fair value, you have a slight "house advantage", just like a casino.

2) It reduces time decay (because you are paying for less time value).

3) It limits your risk and reduces losses when you are wrong about the direction. Since the option is already underpriced, if there is an adverse price move, the option will lose less value than it would otherwise.

4) It increases your profits when you're right about the direction. As the option's premium moves back in line with the fair value, this helps your position.

Quote from Riskarb:

Quote an IV column based upon the midpoint of the bid/offer. Many off the shelf apps like OptionVue or Microhedge will do, or simply quote it in excel.

Use the atm combo vol as the vol for pricing vol skew and under/overpriced values.

Hopefully I'll understand what this means after I've read Baird's book-

 

[Maverick74]

Quote from Neoxx:

I realise the internet's not the most reliable source for information but I read this on www.thepitmaster.com





Hopefully I'll understand what this means after I've read Baird's book-

Yeah, I would disregard that. Totally false. At least, he is misleading you.

 

[Profitaker]

Quote from Neoxx:

In your experience, what have you found to be the most effective way of finding underpriced options?

Unless you know what the future volatility will be, it is impossible to find undervalued options. Options are only undervalued in hindsight, not foresight. Relative mispricing due to Vol skew really is quite small and not a viable strategy for the retail trader paying spreads & commissions.

However, if you know how to calculate future volatility I think we could do some business together....

 

[murray t turtle]

Quote from Neoxx:

I realise the internet's not the most reliable source for information but I read this on www.thepitmaster.com





Hopefully I'll understand what this means after I've read Baird's book-

============
Actually the pitmaster had 4 well thought points except wouldnt call simply applying those 4 a ''house edge'',by buying.

Maverick wondered why call options???;
& you may see call options get more underpriced ,
MUCH more underpriced as long as underlyings keep goING down