Don't take it the wrong way, but I don't think you are in a position to make a comment like that
Options Noob... 1st 100 trades completed
- Thread starter Scataphagos
- Start date
Everyone but Sweet Bobby. Hedge Funds use them as a cheap source of leverage and to engage in limited downside bets. Insurance companies use shorter-dated options to hedge index annuity obligations (there is a separate class of exotic options called "cliquets" or "ratchets that's designed for that) and really long dated options to hedge variable annuity obligations. Pensions use options to hedge their downside etc.
However, that's a wrong question to ask, if you think about it. The right question to ask is "who are the buyers of options at different price levels?". If options are cheap for one or another reason, everyone should and would be willing to buy them (except maybe Sweet Bobby). If the options are priced fair, it's a toss up, some people might like the long convexity trade and some will like the carry. However, if the options are expensive, there are people out there who are forced to buy them - that's when selling gets interesting.
Thank you for taking the time to answer. I need to read up on "cliquets". Can a retail person buy/sell them?
Sorry to ask another question:
How do I know if an option is expensive or cheap? There are so many smart traders, market makers... who have fancy mathematical models, high speed computers, etc. one ought to think most of the time the prices should be fair market so no advantage one way or the other?
Regards,
Hi
Wanted to ask the same question, what makes an option cheap or expensive ?
The first idea it comes it is that the price of an option is the extrinsic value of the premium. So maybe to know if it's cheap or expensive we have to look
at the iv. And to know if the iv is high or low we can look at the iv rank or at the iv percentile.
I am not an option buyer, yes of course I buy options to hedge, but not a frequent price player.
But if I had to buy an option to bet on a directional move it would not be with atm options.
Atm options are the only ones in all the option chain that lose extrinsic value Whether the price goes up or down.
So maybe that is the meaning of expensive.
Wanted to ask the same question, what makes an option cheap or expensive ?
The first idea it comes it is that the price of an option is the extrinsic value of the premium. So maybe to know if it's cheap or expensive we have to look
at the iv. And to know if the iv is high or low we can look at the iv rank or at the iv percentile.
I am not an option buyer, yes of course I buy options to hedge, but not a frequent price player.
But if I had to buy an option to bet on a directional move it would not be with atm options.
Atm options are the only ones in all the option chain that lose extrinsic value Whether the price goes up or down.
So maybe that is the meaning of expensive.
You're correct @raf_bcn. The easiest way is to compare %iv to %sv.
There's a lot of strategies you can use to eliminate that as a concern though. For a pure price play, you can use long term options and sell a put to buy a call will give very close to 1:1 price exposure. If the market is a bit lopsided you can find places where you get a credit on this even though you're closer to the long strike. Most recently, I did the opposite off this on FB as an investment protection...at 154, I sold the 160 November call and bought the 150 put. I got a $1.10 credit. I note this because it illustrated the call was relatively expensive as the put relatively cheap...obviously doesn't look great at the moment...lol. But you could also use a credit like that too make your short side a spread to limit downside with unlimited upside.
Vertical spreads can either limit or exploit the imbalance in option values. A calendar spread can give almost 0 price exposure while letting you profit from increases in volatility...
Earnings releases are another good one to see this in action...you'll pay a lot short term options that expire after an earnings release. Look at some of those this week (admittedly, it's easier to see with an expiry the week immediately before and immediately after the release).
There's a lot of strategies you can use to eliminate that as a concern though. For a pure price play, you can use long term options and sell a put to buy a call will give very close to 1:1 price exposure. If the market is a bit lopsided you can find places where you get a credit on this even though you're closer to the long strike. Most recently, I did the opposite off this on FB as an investment protection...at 154, I sold the 160 November call and bought the 150 put. I got a $1.10 credit. I note this because it illustrated the call was relatively expensive as the put relatively cheap...obviously doesn't look great at the moment...lol. But you could also use a credit like that too make your short side a spread to limit downside with unlimited upside.
Vertical spreads can either limit or exploit the imbalance in option values. A calendar spread can give almost 0 price exposure while letting you profit from increases in volatility...
Earnings releases are another good one to see this in action...you'll pay a lot short term options that expire after an earnings release. Look at some of those this week (admittedly, it's easier to see with an expiry the week immediately before and immediately after the release).
Hi
Thank you for your comment. Never thought buying a synthetic with different expirations.
Have to admit that I have not yet deepen the strategies with several expirations.
It seems the position is price hedged, and the volatility is going to drop after the earnings, so please if you can explain what is the risk.
thanks.
Thank you for your comment. Never thought buying a synthetic with different expirations.
Have to admit that I have not yet deepen the strategies with several expirations.
Yes it seems a very good idea , the difference of volatility is remarkable. I wonder what is the risk here. For example, selling a put with 5 dte. and buying the same strike put with 10 dte.
It seems the position is price hedged, and the volatility is going to drop after the earnings, so please if you can explain what is the risk.
thanks.
Today was a perfect example of people holding calls/puts with an expiration of 7/21 and the market changing completely on them, where they could have gained or lost more if they would have been holding a longer exp date. You never really know where the market is going until after earnings.
Options are just tricky period.
Options are just tricky period.
The risk is the market goes the wrong way on the earnings release. It's not really a good idea in my book, but it does illustrate the possibility well.