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The BEST Indicator to tell whether an Option is OVERPRICED is...
- Thread starter increasenow
- Start date
Market makers are smart. I trade FOP on the ES. Spreads are such that the market value of an option lies about in the middle of the bid/ask spread. And believe me, the spreads are wider than I like. I have noticed that if a small trader places a small (1-5 contracts) limit bid inside the spread, that is the trade to take on. In general, I find that puts are overpriced when VIX is rising--people pay any price for protection. When VIX is low, then calls tend to be overpriced, for the greedy trader will pay any price for speculation. I can remember in 1999-00, I did covered calls. The call premium was about 20% of the share price at the time..make a lot of money..would have made more if I didn't cover and just followed charts. I remember two trades, for example. I bought 300 shares of NITE @100 and sold 3 calls @20. Easiet $6K I ever made. Of course the stock went up to 200 during the period. Another one: Bought 200 shares of QCOM at 200 and sold two calls at 40. Easiest $8000.00 but, of course, the stock sailed to 800. So, to summarize, rising, high VIX=overpriced puts and sinking, low VIX=overpriced calls. When the market is trendless or steady VIX, market makers control absolutely.
Historical Vola
Vola Cone
High Low Vola
Vola Spread
Here is some reading that may be of some help.
Wish you all the best.
www.ivolatility.com
Vola Cone
High Low Vola
Vola Spread
Here is some reading that may be of some help.
Wish you all the best.
www.ivolatility.com
Quote from opt789:
This has been discussed before. You can take this thread out to countless pages and the answer will never change, and most will never accept that answer. Increasenow has yet to actually follow any of the good advice he has been given (on countless threads), and continues to look for easy answers. He has no idea how to trade, doesnât even possess the most basic options knowledge, and yet asks a question to which he couldnât possibly understand the answer. He needs to completely forget about trading options, paper trade an underlying until such time as he figures out that trading isnât for him or learns how to trade, and stop using the word âseriousâ. He will not do these things of course, because he is a child who proved himself incapable of listening.
If you donât already know the answer to the posed question, as a few here have shown they do, then you shouldnât be trading options.
Well said opt. As usual this topic has been talked to death here for a long time. Trying to give an objective answer in defining a subjective phrase is ridiculous.
Quote from increasenow:
The BEST Indicator to tell whether an Option is OVERPRICED is...
1-Implied Volatility
2-Gamma
3-Vega
4-Delta
5-Theta
6-Rho
7-Open Interest
8-Other...?
for sake of discussion..lets use the QQQQ...
Overpriced is difficult...why? It has to do with supply and demand...your estimation of the volatility (absolute and relative), bid/ask, etc.
For example, a QQQQ call is trading at an Imp. Vol of 25 but you think it should trade at 24 you will start selling it till the Imp. Vol has dropped to 24.
2nd, The skew has a nice curve but one strike is off because there are a lot of buyers, you'll sell till skew is ok and you will try to close it (or other way around)
3rd, during the close a market maker (firm) has a position that is to big so they will try to close a part or will hedge it. What happens, they will adjust there prices so people will trade it.
4th, European options trade on a slightly higher Imp. Vol. when the US markets open (uncertainty what will happen), after 30m they will go down
etc
etc
etc
but trust me..as a retail investor options are never over- or underpriced. A market Maker will never let you trade it. If you have a 50 million euro/USD and a supercomputer you are able to trade over- and underpriced options. It's a game controlled by computers.
The best way that I check if an option is overpriced or not is to look at the IV chart. Now, of course this is relative. When IV is within its low range, this is considered relatively cheap. And when IV is in its high range, it is considered relatively expensive.
The reason why when IV is low your option is cheap has to do with vega. Each point that IV goes up, your option goes up by the vega amount, lets assume .20. So if IV jumps up by 10 points, your option premium will gain $2.00, even without price movement.
So, in essence, that is why when IV is low, it is considered cheap because it has the potential to go up in value as IV rises.
Jun
www.tplinvestment.com
The reason why when IV is low your option is cheap has to do with vega. Each point that IV goes up, your option goes up by the vega amount, lets assume .20. So if IV jumps up by 10 points, your option premium will gain $2.00, even without price movement.
So, in essence, that is why when IV is low, it is considered cheap because it has the potential to go up in value as IV rises.
Jun
www.tplinvestment.com