Question about intrinsic value vs time value

[destriero]

Does it get all messy in the first chart because a smaller time to expiry means a lot more volatility in the intrinsic value?

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What about this one then?

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I guess I'm just a dum dum.

As you extend very deep ITM or OTM the result of microstructure can result in wonky figures. Say you're looking at the 99D/1D call/put combo and the option prices are 80.2/0.2 respectively. Say the put is 0.1 bid at 0.3; mid of 0.2. 0.2 is a vol-figure of 18% and someone comes in and bids 0.28 at 23% vol.

Would you sell at 23% vol in that strike looking for the mean reversion?

Models are useful for relative value and stressing.

 

[nooby_mcnoob]

As you extend very deep ITM or OTM the result of microstructure can result in wonky figures. Say you're looking at the 99D/1D call/put combo and the option prices are 80.2/0.2 respectively. Say the put is 0.1 bid at 0.3; mid of 0.2. 0.2 is a vol-figure of 18% and someone comes in and bids 0.28 at 23% vol.

Would you sell at 23% vol in that strike looking for the mean reversion?

I can see that's wonky. I think I get what you're saying: it's just noise and probably can't be arbitraged in any way.

BTW, in this case what is being plotted is actually the last traded price, not the midpoint. Or at least that's what I'm told the 'last' value means.

 

[bloomberg1]

Dude, you worked at Bridgewater? In what capacity?

Opshuns 101.

Calls are the revenue side of the arbitrage. If you don’t understand that then I suggest reading Hull, et al.

You can think of the share forward as embedded in the call. If shares are at 50 and the one year forward is at 51.5, then the 50C will be priced 1.5 more than the 50P, absent dividends. I am wondering how you arrived at excess premium in the calls relating to a higher market. Really?

Imagine if STIRs were at 8%! Market be done goin’ to Pluto!

Same strike calls and puts must trade at =vols or arbitrageurs will short you overpriced calls, buy the underpriced puts, and go long shares. The conversion arbitrage.

I'm conclusion with all the nuances surrounding option pricing, would you confidently say there is no " free lunch". At least not any size and or consistency...?

 

[destriero]

I can see that's wonky. I think I get what you're saying: it's just noise and probably can't be arbitraged in any way.

BTW, in this case what is being plotted is actually the last traded price, not the midpoint. Or at least that's what I'm told the 'last' value means.

The last can be days/weeks old.

 

[destriero]

I'm conclusion with all the nuances surrounding option pricing, would you confidently say there is no " free lunch". At least not any size and or consistency...?

Well I have nearly my entire IRA balance in an arb, but generally no, nobody is going to hand you an edge.

 

[bloomberg1]

I I always thought an arbitrage was completely risk-free buy from counterparty A sell to B clear product or through exchange

 

[nooby_mcnoob]

The last can be days/weeks old.

Looks like there was no volume for the call at that strike. Good read.

Edit: looks like I spoke too soon. Log volume shows there was volume. Interesting.

 

[ironchef]

Looks like there was no volume for the call at that strike. Good read.

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Edit: looks like I spoke too soon. Log volume shows there was volume. Interesting.

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I like your colorful charts.

 

[ironchef]

nobody is going to hand you an edge.

Trade often, trade small, sell high probability premium to generate income.

Just kidding.

 

[nooby_mcnoob]

I like your colorful charts.

You're not the first to say!