ducati916 said:
At the moment using BSOPM, but I do it long hand, and my calculators battery & my brain are getting fried. And by the time I've completed the calculation, the price is historical anyway.
Yowza! Get some software...better still a specialist options broker with a decent platform:
www.thinkorswim.com
www.interactivebrokers.com
www.optionxpress.com an 1 or 2 others.
All others don't even know how to margin properly.
OK Fair value. This can be a contentious subject. What is fair value? This can mean different things to different people (MM, retail, broker) I take it to mean the whether the tradable price is fair relative to your volatility inputs, and here is where it gets tricky.
What volatility should we enter? Statistical volatility must take a subjective retrospective period, and apply it to todays option value. Yet the realized volatility in the ensuing time period may not reflect the statistical volatility at all. Volatility could rise or fall, substantially.
Making Volatility projections are guesses at best. So this "fair value" concept is a tough one. However all the above should be taken to make a (personal and subjective) case for over/undervaluation.
High native levels of volatility do present some challenges which come later
That's true [OTM/ITM]
Skew is something I don't yet look at, as I don't understand it, but, as you allude it may alter the valuation of DITM, I have only been calculating ATM [or at least when I start calculating]
Most of the time, implied volatilities will vary between the ATM and away from the money strikes.
In the SPX options for e.g. ATM are currently trading around 10% Higher strikes are getting down to 8%, lower strike way away from the money around 14-15%. This is because any black swan scenarios will most certainly occur on the downside; this is called a volatility smirk (because of the shape when you graph it). Whereas in stocks, the black swan can fly on both the upside and downside, so IV's will rise the further away from the money you get on both sides. This is called a volatility smile.
It occurs because people will cough up for OTM strikes where they see most risk. The corresponding put/call is then arbed up to the same level.
This can be a help or a hinderance, depending on what you are trying to do.
Spreading, implies a stance, viz. moderately bullish or bearish. I am wanting to be neutral, viz. a straddle, but this is where the overvaluations kill the strategy.
10-4
Shorter timeframes preferrably, 1wk to 1mth.
Now I'm sure the snooker balls make eminent good sense to you, they however look like snooker balls to me, you're going to have to break!
jog on
d998
Ok now I know where we are heading.
Being long gamma (i.e. buying straddles) at high native vols such as BIDU presents some problems.
Firstly, The higher the extrinsic value of options the less gamma there is. This is a problem with straddles because we need gamma in order to manufacture deltas and therefore profit. So we need to go to the near expiries. But then we have to contend with high theta.
If the thing is going to bounce around a lot with strong whippy moves, we can scalp gamma, by continuously hedging back to delta neutral with stock. If you can make more profit in the gamma scalps than theta is costing every day. Thats obviously good. If it suddenly goes quiet on you, you lose.
Another thing to consider is to pay for some of that long gamma by being short the wings i.e. a short butterfly. This will limit the possible loss, but also limit profits in the case of a fat tail occurence.
Best practice is to enter long gamma positions when the prognosis is for an upswing in volatility. i.e. go long vega when IV is at a low.
Then there is the other side of the coin... short gamma (selling straddles/strangles)
This can be playing with fire with a stock like BIDU, unless limiting risk by longing the wings (long butterfly/condor or short irons) but generally the inverse of the above applies.
Cheers