Vertical Spreads for Aggressive Growth

[tplast]

Quote from Cache Landing:

Hey, we have to make assumptions somewhere.

What I mean is that, all other things being equal, you'll always get the same price for the same IV. And the same IV for the same price.

IOW, it is 3.75 because you are entering 12% IV. And it is 12% IV because the price is 3.75

 

[Cache Landing]

Quote from tplast:

What I mean is that, all other things being equal, you'll always get the same price for the same IV. And the same IV for the same price.

IOW, it is 3.75 because you are entering 12% IV. And it is 12% IV because the price is 3.75

Yeah, I understood what you meant. Something that is often misunderstood in the options world.

[EDIT] I was trying to say that the only way he would spontaneously lose $1.00 on monday is if the IV listed did not match the price listed.

One other thing to consider with SPY is the dividends. If I'm not mistaken they just had one, so they shouldn't have another one for a while.

 

[scienter]

Quote from Cache Landing:

Hey, we have to make assumptions somewhere.

[edit] What I meant was that market is unlikely to take $1.00 of his credit away from him over the weekend. They would have to have a big change of heart.

Thanks guys...according to the Ansbacher Index, things are look slightly bearish at this point.... Perfect for those expensive calls I just bought :eek:


It seems to be that IV at some point really becomes a surrogate for price or what the market will bear and less a measure of perceived volatility...in otherwords, the market perceives that things are going higher and so demand is greater and the MM can charge more for their call options.

The reason I say this is simple, if IV is higher for calls and the market thinks that things will get more volatilve to the upside in the future, my ITM calls sould have less premium attched to them the further the market goes up....in otherwords I can see how IV could affect the price of options close to the money, but as you get further out, I would think that the premium would drop...although the premium for spy oct calls this afternoon 4,5,6 points out of the money still had this dollar premium attached....:eek:

 

[Cache Landing]

Quote from scienter:

Thanks guys...according to the Ansbacher Index, things are look slightly bearish at this point.... Perfect for those expensive calls I just bought :eek:


It seems to be that IV at some point really becomes a surrogate for price or what the market will bear and less a measure of perceived volatility...in otherwords, the market perceives that things are going higher and so demand is greater and the MM can charge more for their call options.

The reason I say this is simple, if IV is higher for calls and the market thinks that things will get more volatilve to the upside in the future, my ITM calls sould have less premium attched to them the further the market goes up....in otherwords I can see how IV could affect the price of options close to the money, but as you get further out, I would think that the premium would drop...although the premium for spy oct calls this afternoon 4,5,6 points out of the money still had this dollar premium attached....:eek:

Like I said, the Ansbacher index is contrarian.

Just so you know, this market has been pricing in a premium for calls over puts for quite some time now. Another thing to consider is that it is generally theorized that price action follows a lognormal distribution rather than a normal dist. IOW, potential to the upside will be larger than potential to the downside.

 

[tplast]

Quote from scienter:

It seems to be that IV at some point really becomes a surrogate for price or what the marketyt will bear and less a measure of perceived volatility...in otherwords, the market perceives that things are going higher and so demand is greater and the MM can charge more for their call options.

Yes, it is driven by perceptions and demand but don't confuse statistical volatility with implied volatility. SV is how volatile the underlying has been in the past. IV is implied from the price.

For example, let’s say that the option pricing model is:

Price = IV + 1

If the price is 4, you know that IV is 3. Also, if you know that IV is 3, you know that the price is 4.

If more people start buying the option, the price will go up. If you enter the new price into the model, you’ll get a higher IV.

SV doesn’t have anything to do with the price directly. Were it comes to play is to keep the expectations in check. For example if SV is 6 and people start bidding IV to 8, eventually more people will start feeling that IV is overpriced and start bringing it down to 6.

Of course, in the real model, other factors such as movement of the underlying, time to expiration, interest rates and dividends are also inputs that affect pricing. But IV is the only non observable input, which can only be derived from price.

 

[tplast]

Going back to Scienter's original question. - I'm a geek, cannot let it go until I know

I looked at the skew graph of the SPY and got an eureka! moment. From it, you can see that the lower the strike the higher the IV. So ITM calls and OTM puts are in the high end and OTM calls and ITM puts are at the low end.

So Scienter is comparing an ITM call from the high end to an ITM put from the low end. In other words, the two points with the highest IV difference.

The reason why the skew is this way, is of course, demand and supply.

 

[tplast]

here's the graph

now let the weekend start

 

[momoneythansens]

Quote from scienter:

The reason I say this is simple, if IV is higher for calls and the market thinks that things will get more volatilve to the upside in the future, my ITM calls sould have less premium attched to them the further the market goes up....in otherwords I can see how IV could affect the price of options close to the money, but as you get further out, I would think that the premium would drop...although the premium for spy oct calls this afternoon 4,5,6 points out of the money still had this dollar premium attached....:eek:

You may want to re-evaluate your understanding of price/IV. A cursory read of the first few chapters of Option Volatility & Pricing by Sheldon Natenburg (actually, Chapters 3,4,5,18) should clear most things up.

Good luck!

MoMoney

 

[scienter]

Quote from tplast:

Yes, it is driven by perceptions and demand but don't confuse statistical volatility with implied volatility. SV is how volatile the underlying has been in the past. IV is implied from the price.

For example, let’s say that the option pricing model is:

Price = IV + 1

If the price is 4, you know that IV is 3. Also, if you know that IV is 3, you know that the price is 4.

If more people start buying the option, the price will go up. If you enter the new price into the model, you’ll get a higher IV.

SV doesn’t have anything to do with the price directly. Were it comes to play is to keep the expectations in check. For example if SV is 6 and people start bidding IV to 8, eventually more people will start feeling that IV is overpriced and start bringing it down to 6.

Of course, in the real model, other factors such as movement of the underlying, time to expiration, interest rates and dividends are also inputs that affect pricing. But IV is the only non observable input, which can only be derived from price.

tplast/cache:

Thanks for the help.

 

[scienter]

Quote from momoneythansens:

You may want to re-evaluate your understanding of price/IV. A cursory read of the first few chapters of Option Volatility & Pricing by Sheldon Natenburg (actually, Chapters 3,4,5,18) should clear most things up.

Good luck!

MoMoney

yes thanks for the suggestion....and the benefit of the doubt...that was the most incoherent, muddled dribble that has flown off my keyboard in awhile....I really do need to re-read what I write before sending these things off .....