Premium as % of Strike

Robert Morse said:
IMO, it is about size allocation to risky trades. If you have a $200,000 account and expect an OTM put will expire and is overpriced and your sell "some" as a percentage of your allocation, that can work well. That way in times of stress, you are not forced to buy back an OTM put that just expanded. However, if you do this with 50% or more (A random level) of your risk based account (PMA or Futures), there will be a time you will get hurt. Selling naked options is scale in a reg-t account is not margin efficient.

I know your question is about what strike to sell, but that is up to you and I can't help you with that.
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Thank you for the reply Morse.

You are talking about risk management. I was just curious about option pricing.

I thought there would be a way to compare different option premiums at various strikes.

For example $IWM JULY (34d) 151 at-the-money call is $3.75.

$3.75 is 2.5% of 151.

Knowing this, could one compare this percentage to other months out with the same strike and come to any conclusions? Or compare different strikes of the same month etc? Or is this all a bunch of deedle-deedle-queep?
 
Philo Judeaus said:
This is essentially the answer I was looking for.

Looking at $SPX and $SPY option chains as you all know $SPY is 1/10th the size of $SPX, so obviously the premium will also be 1/10th the size.

I was just curious if one could gage the moneyness (value) of premium at different strikes by comparing the price as a percentage of the strike price?
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It will be a function of implied volatility which a higher volatility will mean a higher % of strike.

So you could get the same comparison looking at vol vs’s Dolllar price
 
Philo Judeaus said:
Thank you for the reply Morse.

You are talking about risk management. I was just curious about option pricing.

I thought there would be a way to compare different option premiums at various strikes.

For example $IWM JULY (34d) 151 at-the-money call is $3.75.

$3.75 is 2.5% of 151.

Knowing this, could one compare this percentage to other months out with the same strike and come to any conclusions? Or compare different strikes of the same month etc? Or is this all a bunch of deedle-deedle-queep?
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Your answer remains NO
 
I presume you are referring to the Premium % that one would get for selling ATM Options?

In that case- one of the best ways to understand rise in IVs is to get a sense of selling ATM Straddle and what is the % move required in the underlying stock before one breaks even for option buyers or losses money if you are an Option seller.

Here is the Historical straddle premium % and with IV for 30 Day ATMs:
https://www.raltin.com/spy/ova/

Is this what you were referring to?

 
@Raltin

Your website is interesting, I'm checking it out now.

But no thats not what I'm talking about.

I mean simply: Looking at premium prices at any strike in any option chain, is there any benefit looking at the premium price as a percentage of the associated strike. It doesnt have to be ATM, it can be ITM, OTM, ATM.

I was wondering if any traders gauged and viewed option chains this way as one of their metrics for finding cheap/expensive options.
 
Although I see what you are getting at, since ATM would be the standard to look at, kinda like how every time I go into an option chain the first thing I look at is the ATM vol and premium of the call/put.

Example: AAPL JULY 19 (28) $200 ATM Call: $4.53 = 2.3% (4.53/200)

Example: USO JULY 19 (28) $12 ATM Call: $0.50 = 4.8% (0.50/12)

Using these random samples do these percentages mean anything? Anything at all? Just curious if traders look at premium/strike percentages to get a feel of moneyness/cheapness/value/expensiveness of options this way.
 
Philo Judeaus said:
Although I see what you are getting at, since ATM would be the standard to look at, kinda like how every time I go into an option chain the first thing I look at is the ATM vol and premium of the call/put.

Example: AAPL JULY 19 (28) $200 ATM Call: $4.53 = 2.3% (4.53/200)

Example: USO JULY 19 (28) $12 ATM Call: $0.50 = 4.8% (0.50/12)

Using these random samples do these percentages mean anything? Anything at all? Just curious if traders look at premium/strike percentages to get a feel of moneyness/cheapness/value/expensiveness of options this way.
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Why not just look at implied volatility?
 
I just looked over a few of your posts. It seems like you are persistent with this question.

Think about what you are looking for? If someone said, sell options that are greater than 10% of the strike and buy options that less than 2%. What would that mean?

It would mean:

1. Buy all Deep OTM calls/puts.
2. Sell ATM options on high volatility stocks.

Does that seem like an edge? Buying as a % of strike does not mean a whole lot. You should be curious about how volatility is priced; relatively and in absolute terms.
 
TheBigShort said:
I just looked over a few of your posts. It seems like you are persistent with this question.
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Thank you for the reply.

I guess what I was looking for was if any experienced traders used this as a quick metric/guide to value the option premium at a quick glance, to supplement them.

And I agree, I am focused mostly on volatility, I was just curious to see if % of strike had any merit.

Cheers
 
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