Some obvious facts...

[mutluit]

Some obvious facts:

- The payoff (premium) of a higher volatile options is lesser than that of a lower volatile options.

- An increasing of Implied Volatility (IV) is very valuable (for both Calls and Puts), so buy at low volatility.

- Downside is limited, but Upside is unlimited...
(hint: a stock cannot fall below 0...


...add yours...

 

[sgfee123]

Might want to check your "obvious facts".

The seller of a high volatility option demands a HIGHER premium because it is riskier to sell than a low volatility option. Therefore the premium for selling a high volatility option is GREATER than the premium for selling a low volatility option.

The payoff (premium) of a higher volatile options is GREATER than that of a lower volatile options.

 

[mutluit]

Quote from sgfee123:

Might want to check your "obvious facts".

The seller of a high volatility option demands a HIGHER premium because it is riskier to sell than a low volatility option. Therefore the premium for selling a high volatility option is GREATER than the premium for selling a low volatility option.

The payoff (premium) of a higher volatile options is GREATER than that of a lower volatile options.

No, Sir!
What you say might sound logical, but math proves you wrong, really.
Just convince yourself by using an options calculator...

Here's the proof, the last 2 columns are the payoffs. The low vola options have about twice higher payoffs...:

Vola=40.00%
   deltaSpot%        spot         call         put           cprm0PL%      pprm0PL%
-----------------------------------------------------------------------------------
     5.00000%     105.00000       9.26743      4.19038      45.35924%    -33.44915% 
     4.00000%     104.00000       8.62549      4.54845      35.29047%    -27.76249% 
     3.00000%     103.00000       8.00666      4.92961      25.58407%    -21.70890% 
     2.00000%     102.00000       7.41159      5.33455      16.25049%    -15.27780% 
     1.00000%     101.00000       6.84090      5.76385       7.29917%     -8.45966% 
     0.00000%     100.00000       6.29507      6.21803      -1.26208%     -1.24655% 
    -1.00000%      99.00000       5.77454      6.69749      -9.42664%      6.36822% 
    -2.00000%      98.00000       5.27964      7.20259     -17.18909%     14.39015% 
    -3.00000%      97.00000       4.81064      7.73359     -24.54531%     22.82342% 
    -4.00000%      96.00000       4.36767      8.29062     -31.49331%     31.67002% 
    -5.00000%      95.00000       3.95074      8.87369     -38.03281%     40.93026% 


Vola=20.00%
   deltaSpot%        spot         call         put           cprm0PL%      pprm0PL%
-----------------------------------------------------------------------------------
     5.00000%     105.00000       6.36574      1.28869      98.30039%    -58.84253%
     4.00000%     104.00000       5.63693      1.55989      75.59727%    -50.18125%
     3.00000%     103.00000       4.95013      1.87308      54.20234%    -40.17877%
     2.00000%     102.00000       4.30833      2.23128      34.20957%    -28.73873%
     1.00000%     101.00000       3.71408      2.63704      15.69806%    -15.78006%
     0.00000%     100.00000       3.16933      3.09228      -1.27170%     -1.24073%
    -1.00000%      99.00000       2.67521      3.59817     -16.66392%     14.91596%
    -2.00000%      98.00000       2.23221      4.15516     -30.46406%     32.70490%
    -3.00000%      97.00000       1.83987      4.76282     -42.68597%     52.11190%
    -4.00000%      96.00000       1.49691      5.41986     -53.36955%     73.09607%
    -5.00000%      95.00000       1.20125      6.12421     -62.57948%     95.59106%

 

[cdcaveman]

its all relative.. how can you make such general assumptions.. sometimes low vol premium is great to sell.. sometimes high vol is great to buy.. its irrelevant what your saying

 

[mutluit]

The above said about high vola vs. low vola options is primarily valid for options BUYING (ie. going long Calls, going long Puts ).

As the results show, another fact is:
high vola options cost much more than low vola options,
and the funny and unjust fact is: high vola options pay much less than low vola options...
A really mad imbalance...

 

[sle]

Quote from mutluit:

A really mad imbalance...

Actually, a relatively simple back-test will show you that straddles for high beta, high vol stocks are a better buy then straddles on low-beta low-vol stocks, if traded in beta-neutral ratio. In general, the lower the vol, the higher is the proportional risk premium.

 

[mutluit]

Quote from sle:
Actually, a relatively simple back-test will show you that straddles for high beta, high vol stocks are a better buy then straddles on low-beta low-vol stocks, if traded in beta-neutral ratio. In general, the lower the vol, the higher is the proportional risk premium.

My simulations using strangles (similar to straddles) show the opposite, but I haven't "traded in beta-neutral ratio".

 

[sle]

Am I to understand that, as per the other thread, your simulation uses historical volatilities, not real-life implied volatilities?

 

[mutluit]

Quote from sle:
Am I to understand that, as per the other thread, your simulation uses historical volatilities, not real-life implied volatilities?

It's irrelevant, as what matters here is the proportion/relation of the results

 

[sle]

Quote from mutluit:

It's irrelevant, as what matters here is the proportion/relation of the results

You are pricing an option and then calculating a real-life payoff, how could the only variable pricing input be "irrelevant"?