Impact of trading range on option prices

N

nfactorial

Hi,

What's the impact of the daily trading range on option prices?

Let's say that the underlying will trade tomorrow in a much narrower range than today, will I see a significant change in the option prices?
 
Not even barely advanced in options pricing theory, but from limited experience and screen time I think expectation, which partly depends on time to expiration, plays a big role in option pricing.
 
Quote from nfactorial:

Hi,

What's the impact of the daily trading range on option prices?

Let's say that the underlying will trade tomorrow in a much narrower range than today, will I see a significant change in the option prices?
More...
If everyone in the mkt agrees that the volatility of the underlying will be reduced tomorrow, you will, indeed, see it affect implied vol and option prices. Stuff like this happens in the world of rates over significant econ release days. I'd guess it also occurs in equities with the earnings announcements.
 
Quote from nfactorial:


Let's say that the underlying will trade tomorrow in a much narrower range than today, will I see a significant change in the option prices?
More...
Two words: IV and delta

OK, 2 letters and a word :)
 
That's the great thing about options: You can profit, if short, even if the underlying doesn't move. But if volatility rises, then the prices may rise, depending on time decay.
 
Thank you!

So if the market expects tomorrow's trading range to be X and my opinion is that the range will be (much) lower than X, by selling some vega I should be making a profit.

Right?
How can I compute X?
 
Quote from nfactorial:

Thank you!

So if the market expects tomorrow's trading range to be X and my opinion is that the range will be (much) lower than X, by selling some vega I should be making a profit.

Right?
How can I compute X?
More...
I can share with you a secret technique I've been privy to for some time now that can do that.

Just wire 10,000 dollars to my account.

I prefer Western Union.

If you're still wary, just call Blankfein so he can hedge this transaction.
 
Quote from nfactorial:

Thank you!

So if the market expects tomorrow's trading range to be X and my opinion is that the range will be (much) lower than X, by selling some vega I should be making a profit.

Right?
How can I compute X?
More...
Strictly speaking, you need a price for an ATM straddle that expires tomorrow and for one that expires the day after. You can then try to compute the implied fwd variance. Otherwise, if you can get a quote in a 1d fwd ATM straddle, you can have a version of your X directly.

In the world of rates, these are old and tired games, but people still play them occasionally.
 
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