OptionVue Software

[rs7]

Originally posted by windsurfer

(Of course, sometimes there is a reason for over-priced options!!).

I was a market maker at the Chicago Board Options Exchange. My position was to act in the capacity as an “upstairs trader” for a corporation that generated income from speculating in option positions. Primarily, their objective was to “sell premium”….mostly short combinations. The concept being based upon selling what were theoretically overpriced options according to Black Sholes or Cox Ross Rubenstein models.
My experience with these trades over time seemed to indicate that the market is seldom wrong. If an option was “overpriced”, there was generally a good reason. Whether it was because the implied volatility was not properly adjusted in the formula, or there was some fundamental impact that was not taken into consideration yet (takeovers, mergers, non-public news, etc.), the selling of premium was really good in theory, but in reality, it generally succumbed to the accuracy of the market itself.

 

[windsurfer]

Quote from RS 7:
"My experience with these trades over time seemed to indicate that the market is seldom wrong. If an option was “overpriced”, there was generally a good reason. Whether it was because the implied volatility was not properly adjusted in the formula, or there was some fundamental impact that was not taken into consideration yet (takeovers, mergers, non-public news, etc.), the selling of premium was really good in theory, but in reality, it generally succumbed to the accuracy of the market itself."

My reply:

Thanks for the insight. I've noticed the same thing- I'll even BUY straddles if the "overpriced option" looks suspicious, like on a drug stock- I did this with IMCL the day before the "surprise" FDA announcement.

I prefer, when selling premium, to use index options for this reason.

 

[nkhoi]

Originally posted by windsurfer

I do a daily Opscan to find over-priced and under-priced options.
(Of course, sometimes there is a reason for over-priced options!!).

Linda Raschke said if it is over-priced then others know something that you don't know, jump right on, ask for reason latter.