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Underlyings With High vs. Low Prices -- What's the Difference?
- Thread starter dragonman
- Start date
True, you will be getting the same greeks and prices in the Black-Scholes world. However, in real world, do you think the liquidity profile, volatility risk premium, directional component of volatility and "jumpiness" of the asset would be different?Quote from spindr0:
As I mentioned previously, if all pricing parameters other than the underlying's price are equal, then a similar pecentage change in the UL will result in the same percentage price in the options. You can verify this for yourself with an option pricing formula.
I've been trading the spx and the spy. They are priced at a 10 to 1 basis and they follow each other very closely. However I've noticed the options premiums don't follow each other on a 10 to 1 basis. Maybe 6 or 7 to 1. But the spx is safer to trade assignment wise so there is some trade off there. Not sure if anyone else can explain any other differences? Thanks.
I really don't know what any of that has to do with the OP's question. His question was that all if pricing parameters other than underlying price are equal (such as volatility, time to expiration, etc.), should there be any difference in the way the options perform. IOW, will the respective options appreciate in value by the same percents? I say yes. Do you believe otherwise, in the context of his specific question?Quote from sle:
True, you will be getting the same greeks and prices in the Black-Scholes world. However, in real world, do you think the liquidity profile, volatility risk premium, directional component of volatility and "jumpiness" of the asset would be different?
Quote from spindr0:
His question was that all if pricing parameters other than underlying price are equal (such as volatility, time to expiration, etc.), should there be any difference in the way the options perform.
OP question was, as far as I read it:
Quote from dragonman:
Should there be any difference regarding implementing an options strategy on underlyings that have high prices (such as above $100) and underlyings that have low prices (such as below $10)?
So, from the perspective of practical use ("implementation"), there definitely are differences. Does not mean you are wrong, it's just what I understood his question to be.
Quote from bc1:
I've been trading the spx and the spy. They are priced at a 10 to 1 basis and they follow each other very closely. However I've noticed the options premiums don't follow each other on a 10 to 1 basis. Maybe 6 or 7 to 1. But the spx is safer to trade assignment wise so there is some trade off there. Not sure if anyone else can explain any other differences? Thanks.
Can you show an example of this? If you are right, then it's a pretty easy arbitrage.
Thanks for all the responses so far.
In the CBOE's rulebook there is a rule that relates to the
permissible price deviation from the option's theoretical price, so that if an option trade is within that range the trade will usually not be considered an obvious price error for bust purposes. I noted that the range regarding options with high prices (such as above 20 points premium) is much lower, in percents, than the range regarding options with low prices (such as below 2 points premium).
See the link:
http://cchwallstreet.com/CBOETools/...nual-cboe_6.25&manual=/cboe/rules/cboe-rules/
I assume there is a reason that the exchange allows such different ranges in percents, and I want to understand how it can be relevant to my original question as to the difference between options with high premiums and low premiums. Do you have any idea?
In the CBOE's rulebook there is a rule that relates to the
permissible price deviation from the option's theoretical price, so that if an option trade is within that range the trade will usually not be considered an obvious price error for bust purposes. I noted that the range regarding options with high prices (such as above 20 points premium) is much lower, in percents, than the range regarding options with low prices (such as below 2 points premium).
See the link:
http://cchwallstreet.com/CBOETools/...nual-cboe_6.25&manual=/cboe/rules/cboe-rules/
I assume there is a reason that the exchange allows such different ranges in percents, and I want to understand how it can be relevant to my original question as to the difference between options with high premiums and low premiums. Do you have any idea?
I can see that interpretation if you ignore the OP's criteria that all other parameters except for the underlying price are equal. Obviously, implementation may be different based on different behavior of his $10 and $100 stocks but if all else is equal, option pricing is linear with respect to the UL's price.Quote from sle:
So, from the perspective of practical use ("implementation"), there definitely are differences. Does not mean you are wrong, it's just what I understood his question to be.
If the two UL's track each other at an exact ratio of 10:1 and IV's are the same, the options should track pretty close to 10:1. IRL, they don't plus spread size varies. I assume there may be other small discrepancies as well. So I wouldn't expect an exact 10:1 correlation. But close.Quote from bc1:
I've been trading the spx and the spy. They are priced at a 10 to 1 basis and they follow each other very closely. However I've noticed the options premiums don't follow each other on a 10 to 1 basis. Maybe 6 or 7 to 1. But the spx is safer to trade assignment wise so there is some trade off there. Not sure if anyone else can explain any other differences? Thanks.
6 or 7 to 1 is a bit extreme so like others have asked, got any examples?