Weekly Options Experiment

Ok, first week ended with a loss of -1.9%. Markets moved -2.32% against me on average. Too early to say if my model is working as it didn't have a chance to kick in yet.
 
I have a question for more experienced traders:
RIMM put options, expiring in 7 days:
Strike 10.5: bid at 0.05, bid iv: 107%
Strike 13: ask at 0.54, ask iv: 79%

Why is no one buying 13 and selling 10.5? From my early experiments with option pricing I learnt that this 'volatility arbitrage' is actually quite a good deal. I thought markets are efficient enough to make it stop from happening and it doesn't happen very often.
Also, my model shows that 10.5 option is actually underpriced comparing to 13. So either MM has rubbish models and volatility arbitrage is worth looking into, or there are other reasons (like a very good model) for this mispricing and long put vertical 10.5/13 will not make money?
 
Quote from optisum:

I have a question for more experienced traders:
RIMM put options, expiring in 7 days:
Strike 10.5: bid at 0.05, bid iv: 107%
Strike 13: ask at 0.54, ask iv: 79%

Why is no one buying 13 and selling 10.5? From my early experiments with option pricing I learnt that this 'volatility arbitrage' is actually quite a good deal. I thought markets are efficient enough to make it stop from happening and it doesn't happen very often.
Also, my model shows that 10.5 option is actually underpriced comparing to 13. So either MM has rubbish models and volatility arbitrage is worth looking into, or there are other reasons (like a very good model) for this mispricing and long put vertical 10.5/13 will not make money?
More...

107-vol is under-priced relative to a 79-vol, but you want to go long the put vertical? Which is it? You're entire post is a series of contradictions.

A nickel put is rarely a good short. It's going to cost you a penny to transact (13buy/22sell in vol at a penny). I'll admit I am confused by your post as you state it's both over and under-priced.

The nickel put is trading at a higher vol, but again, it's a nickel. If you net four-cents you're not selling any skew at all.

Nickel wings are bought as stops, and will routinely trade double or triple the ATM vol. Models don't represent anything approaching reality when you're dealing in pennies.
 
Quote from atticus:

107-vol is under-priced relative to a 79-vol, but you want to go long the put vertical? Which is it? You're entire post is a series of contradictions.

A nickel put is rarely a good short. It's going to cost you a penny to transact (13buy/22sell in vol at a penny). I'll admit I am confused by your post as you state it's both over and under-priced.

The nickel put is trading at a higher vol, but again, it's a nickel. If you net four-cents you're not selling any skew at all.

Nickel wings are bought as stops, and will routinely trade double or triple the ATM vol. Models don't represent anything approaching reality when you're dealing in pennies.
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I'm confused as well. Add the fact that I'm just starting options, and posts don't make sense.
Here is how I understand it:
Values of IV (107 & 79) come from tradeMonster app and are calculated according to Black-Scholes.
When I started experimenting with options, I noticed that buying an option with higher IV than sold option's IV results in mostly good trades. As I understand it, 10.5 is overpriced relative to 13, as it has higher IV (of Black-Scholes). If I buy put 13 and sell 10.5, I'm long vertical put (bearish). Of course, this only makes money when price at expiration is below 12.51 (13 - 0.54 + 0.05). The thing is, I'm selling volatility at higher price than I'm buying, and statistically I will make money even if my trades are random.
This is what my experiments showed me and I backtested it with options' prices guesstimated via Black-Scholes. I thought that it can't be that easy, so I developed my own model to price options. That's what second part of my question asks. According to my model, option 10.5 is actually underpriced relatively to 13 (completely over way round than Black-Scholes - it happens rarely).
I'm wondering why no one takes this trade (long 13, short 10.5)???
What's the simplest and most logical explanation?
 
Quote from optisum:

The thing is, I'm selling volatility at higher price than I'm buying, and statistically I will make money even if my trades are random.
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No, you're fxxked if you buy that bear vertical and the shares rise, regardless of the current vol-figure on that 10-put. Even if you hedge delta from inception there is no guarantee of profitability as you are long vol. You can still lose *IF* you're gamma-trading "frictionless" at zero comms and the vol to exp comes in lower than the vol you're buying.

Why not buy it? Your basing your over-valuation argument on a penny in notional premium (the $ value of the nickel put over ATM vol). 100 * 0.01 = $1. How far will that dollar get you? You're still long the put-spread from $49.
 
Quote from atticus:

No, you're fxxked if you buy that bear vertical and the shares rise, regardless of the current vol-figure on that 10-put. Even if you hedge delta from inception there is no guarantee of profitability as you are long vol. You can still lose *IF* you're gamma-trading "frictionless" at zero comms and the vol to exp comes in lower than the vol you're buying.

Why not buy it? Your basing your over-valuation argument on a penny in notional premium (the $ value of the nickel put over ATM vol). 100 * 0.01 = $1. How far will that dollar get you? You're still long the put-spread from $49.
More...

Ok, I did some more test and they confirm what you're saying. Didn't see it before - basically short strike is too far and therefore too cheap to mean anything.
Thanks, it all makes sense now.
 
Hahaha!
RIMM changed its name to BBRY and my options were sold and bought for $0.00, costing me virtual $-1k. I hope in real life it worked better for options holders, but I'm not going to put up with this idiotic tradeMonster platform any more, so I will open paper account at thinkorswim and start from scratch again on Friday.
 
Ok, one last try, as this thread looks stupid enough. Paper account reseted to $100k. New trades:
Buy 1 AAPL Feb-8-13 435 Put
Buy 31 BAC Feb-8-13 11.5 Call
Buy 2 BIDU Feb-8-13 110/115 Put Vertical
Buy 15 C Feb-8-13 42.5 Call
Buy 50 F Feb-8-13 13 Call
Buy 4 FB Feb-8-13 27/28.5 Call Vertical
Buy 1 GOOG Feb-8-13 765 Call
Buy 8 IBM Feb-8-13 205 Call
Buy 4 BBRY Feb-8-13 13.5/15.5 Call Vertical
Buy 10 SPX Mar-28-13 1460/1470 Put Vertical as insurance.

I tried ToS platform and didn't like it. It's quicker and probably better for more advanced trades but I missed some features that would make my trades quicker. As this is only an experiment on paper money, I'm willing to suffer through this platform for the sake of not wasting too much time on that.
 
Some trades this afternoon:
Sell 2 BIDU Feb-8-13 110/115 Put Vertical to close
Buy 4 BIDU Feb-8-13 95 Put to open
Buy 4 BBRY Feb-8-13 15.5 Call to close
Sell 4 BBRY Feb-8-13 16.5 Call to open
 
I have closed most positions (except for GOOG and SPX) and opened new ones for the next week:
Buy 1 AAPL Feb13 470 Put
Buy 41 BAC Feb13 12 Call
Buy 6 BBRY Feb13 16/17.5 Call Vertical
Buy 4 BIDU Feb13 95 Put
Buy 10 C Feb13 43 Call
Buy 20 F Feb13 13 Call
Sell 12 FB Feb13 29/30.5 Put Vertical
Buy 9 FXE Feb13 133 Call
Buy 9 GLD Feb13 162.5 Call
Buy 1 GOOG Feb13 790 Call
Buy 16 IBM Feb13 205 Call
Buy 35 SLV Feb13 31 Call
 
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