If I believe that the gold price will rise with dollar debasement, and buy deep ITM calls (JAN2010 80Calls) , how does IV affect leaps? I see that over the past year,for the most part, HV and IV tracked each other pretty closely, but over the past 3 months, IV has broke out above HV. Does this mean HV is likely to track higher, or IV lower as a mean reversion? Thanks for any insights.
Leaps on GLD
- Thread starter coveredballs
- Start date
the only one of the questions above I can reply to is:
how does IV affect leaps?
LEAPS (not 'leaps') are very rich in vega. That means that an increased in implied volatility has a very large influence on the price of LEAPS options.
When you trade LEAPS, IV is much more important that when you trade shorter-term options.
Mark
Hi Mark,
Thanks for your response, I read your blog often by the way to continue my education.
So if a LEAP has an .87 delta, and is in the money with very little theta as a percentage of the option price because it has a large intrinsic value, does IV affect the actual delta, which, in turn, affects the option price?
Or does it just affect the vega, and leave the delta virtually unchanged?
Thanks for your response, I read your blog often by the way to continue my education.
So if a LEAP has an .87 delta, and is in the money with very little theta as a percentage of the option price because it has a large intrinsic value, does IV affect the actual delta, which, in turn, affects the option price?
Or does it just affect the vega, and leave the delta virtually unchanged?
In general, they will tend to approach historical levels but that could be next month or next year and sometimes, never. So the only given is that near term, either one could approach the other or both could meet somewhere in the middle. There's no way to know.
Option pricing component are intertwined so a change in any input will result in a change in an output as well as its derivatives. IOW, if IV changes, delta changes.
I don't like buying Theta. I use LEAPS as a surrogate to the underlying, I don't want to own gold, just rent it for a little while.
I'll buy the LEAP and sell premium against it in the front months, two ways to win.Thanks spin.
For diagonals, you might consider middle expirations in order to reduce downside exposure (certainly over 2011 LEAPS which was not the expiration you mentioned).Quote from coveredballs:
I don't like buying Theta. I use LEAPS as a surrogate to the underlying, I don't want to own gold, just rent it for a little while.
Just to clarify, are you saying instead of selling OTM calls in say April, I should go further out to say July?