Underlyings With High vs. Low Prices -- What's the Difference?

[newwurldmn]

Quote from spindr0:

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.

6 or 7 to 1 is a bit extreme so like others have asked, got any examples?

Any descrepencies should be explained by dividends (spy is lumpy and spx is not), the extra day of optionality in spy, and any increase in funding requirements due to hedging with spy vs spx futures.

Except the dividends, the other two factors should be small and indistinguishable to any retail level trader (and most institutional level ones).

The dividends are real however, but they can only explain at most 60 cents/ 6 points in valuation (and that for short dated deep in the money call options).

I think the original guy made a mistake.

 

[Kevin Schmit]

Quote from newwurldmn:

Any descrepencies should be explained by dividends (spy is lumpy and spx is not), the extra day of optionality in spy, and any increase in funding requirements due to hedging with spy vs spx futures.

The biggest differnce would be European (SPX) vs. American (SPY).

Dividends affect calls and puts in opposite directions. Roughly nets out overall.

The extra half day in the SPY can definitely be a factor, especially in the last week before expiry.

Cash vs shares settlement can be a factor in some names, but not SPX/SPY to my knowledge.

 

[newwurldmn]

Quote from Kevin Schmit:

The biggest differnce would be European (SPX) vs. American (SPY).

Dividends affect calls and puts in opposite directions. Roughly nets out overall.

The extra half day in the SPY can definitely be a factor, especially in the last week before expiry.

Cash vs shares settlement can be a factor in some names, but not SPX/SPY to my knowledge.

American vs European shouldn't matter too much in reality. Because the optionality of American can only really matter in DITM calls before dividends (only 4x a year and they happen to be on expiry days anyway) and DITM puts which are really a funding issue (and funding right now is really cheap).

Cash vs stock settlement would only matter in so far as funding costs go up for SPY. However, I doubt this is even a real issue as rates are so low.3

 

[Rationalize]

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)?

The tick granularity can make things interesting from a spread capture perspective, if you're into that kind of thing.

 

[bc1]

Ok guys. I just checked the 117-118 spy call spread which is .53 and the 1170-1180 spx call spread is 5.30 for DecWK1. That's 10 to 1 like you say. But right now the premiums are static.

The times I'm thinking of were the last two Friday mornings, about mid morning, when I was comparing them on the last day of the weekly expiration. This was during some volatile trading times. I'll watch it and post back if I can come up with something of a great disparity.

I do pull my figures when looking at spreads from the "last" column of the options chain. Also seems like lately when looking at the NTM calls and puts, there will be one in the last column about a dollar off from what it should be by looking at the bid and ask columns. I assume it is from an older sale.

 

[Martinghoul]

Quote from sle:
Definitely true in the equity world - lower-priced stocks are more volatile. In general, people attribute it to the "leverage effect" and one could come up with a number of other explanations. So, assuming that you own a 50 vol ATM option on a 5-dollar stock and a 50 vol ATM option on a 50-dollar stock, the actual "form" of volatility will be very different.

Is there any semi-convenient widely-accepted formalization of this stuff in the equity mkt? Something like the SABR beta that everyone is so attached to in the world of rates? Just curious, is all...