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

D

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)?

Given that all other parameters except for the underlying price are equal (such as volatility, time to expiration, etc.), should there be any difference in the way the options are performing (for example, regarding the options price appreciation in percents given a certain percentage of appreciation of the underlyings)? Or there should not be any material difference in percents, since even if the option on the high price underlying costs more, it will appreciate in value by the same percents as the low cost option?

Is there any difference in this regard between trading single options and trading spreads (such as vertical spreads)?

Also, if there is any other difference between such options which I did not mentioned (of course except for the options premium) please let me know.

Thanks!
 
I can't comment directly on how this works in the world of equities, but it does have an effect on the dynamics and pricing in, for example, the world of rates (simplistically, affects normal/lognormal behaviour). Maybe sle can help with how this works w/stocks.
 
hmm, need to think about this...

One thing is the commission, at IB its the same for an option with a
high or low price of the underlying.

So we need examples: SPY, SPX, RUT option combo's
I'll dig into it later.
 
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.

For example, if you have a $10 and a $100 stock with the same IV and expiration and each moves up 10%, the 9.5 and 95 put will drop the same pct as each other and the 10.5 and 105 calls will rise the same pct. as each other. Toss in some passage of time and and/or an identical amount of IV change and the result is the same (other than a rounding error).

Short answer? In regard to UL price, it's linear.
 
I tend to buy puts on low priced stocks. and buy calls on the higher prices ones.

generally speaking, if the stock is under 10, usually it's on the down-trend. And the rate of the price drop tend to be large.

Another good short strategy is to short stocks under 15 and hedge it with the stocks with higher prices, for example, short MGM, and buy LVS.


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)?

Given that all other parameters except for the underlying price are equal (such as volatility, time to expiration, etc.), should there be any difference in the way the options are performing (for example, regarding the options price appreciation in percents given a certain percentage of appreciation of the underlyings)? Or there should not be any material difference in percents, since even if the option on the high price underlying costs more, it will appreciate in value by the same percents as the low cost option?

Is there any difference in this regard between trading single options and trading spreads (such as vertical spreads)?

Also, if there is any other difference between such options which I did not mentioned (of course except for the options premium) please let me know.

Thanks!
More...
 
Quote from Martinghoul:

I can't comment directly on how this works in the world of equities, but it does have an effect on the dynamics and pricing in, for example, the world of rates (simplistically, affects normal/lognormal behaviour). Maybe sle can help with how this works w/stocks.
More...

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.
 
Quote from mikeenday:

I tend to buy puts on low priced stocks. and buy calls on the higher prices ones.

generally speaking, if the stock is under 10, usually it's on the down-trend. And the rate of the price drop tend to be large.

Another good short strategy is to short stocks under 15 and hedge it with the stocks with higher prices, for example, short MGM, and buy LVS.
More...

You are manipulating systematic risks towards your advantage with this strategy but open to surprises with each individual stock.
 
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.
More...

Assuming that the two underlyings have the same volatility (they could be a 15-dollar stock and a 150-dollar stock, both of high quality and stable companies) should there be any difference in the options behaviour, other than the premium paid or the commissions involved?
 
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