Got a question earlier regarding options in FRE. Namely why are puts down with the stock down. Are market makers in there manipulating?
First off, if MM's had that kind of power, I would still be one.
As to what happens to cause this, options essentially have two price drivers. One is the price of the underlying instrument, the other is the volatility. Volatility can sometimes move so much as to more than offset a directional move. This happens during volatility spikes. And it happens again when that spike evaporates.
Bottom line is many do not seem to grasp the concept that volatility is not set in stone. Rather, it is a moving object. A market maker is not obligated to keep his volatility at the same level as it was when you last traded with him. It's a market, a pricing of risk. There's a fair chance a sudden move in volatility blind-sided him too.
Options Trading Beginner runs a nice series of lessons on this sort of thing.
12 comments:
If a person does not understand how volatility effects options prices...and how volatility actually works in the market on minute to minute day to day basis....well, that person should not get NEAR an option.
yeah, I would agree. So help me, I get that sort of question a couple times a month. It's like a dual level of non-understanding, both about volatility and about how the markets in options work.
Is it me or do you see the possibility of a popular board game when you look at that collage of Melissa?
..And Adam I gotta say, you have taught me a hell of alot more about the pricing of options than any of my finance professors ever have, lol thanks for your daily insight.
glad I could help.
And yes, that would be an awesome board game, working on it now as I type.
I wrote an article (SFO Magazine) in March 2005 that describes this volatility crunch in some detail.
Here's the link:
http://sfomag.com/article.aspx?ID=620
wow, great stuff, I'm going to run a link to that in the next couple days. You hit on every misconception and salient point. Thanks.
I must be wrong about this 'shorts as the devil' business as so many are now coming out and saying what was obvious to me some time ago. There must be nothing to it at all. Never mind.
http://www.cnbc.com//id/25677514?__source=yahoo|headline|quote|text|&par=yahoo
I think it’s incumbent upon the SEC to get the people those false rumors and, companies should come up and ask for proof. If they don’t have the proof, these people should be prosecuted,” added Zamansky.
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Hell no, we should give them a medal and a free ticket to the playoffs.
In all fairness this is from a link on the same page. Note the date. lol
By CNBC.com | 18 Jul 2007 | 01:04 PM ET
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Lehman Brothers denied market rumors that it is going to take a writedown related to subprime exposure. The rumor dented stock prices and spurred buying in Treasurys, traders said.
"The rumors regarding subprime exposure are totally unfounded," a Lehman spokeswoman said. Rumors have been circulating since mid-morning that Lehman specifically, and brokers and banks in general, will soon be revealing that they will have losses related to sub prime.
The latest round of worrying and rumor mongering follows Bear Stearns disclosure last night that one if its problem hedge funds is worthless and the other is worth less than a tenth of its value.
Despite the denial, stocks continued to decline and selling was particularly harsh in the brokerage group. Lehman, Goldman Sachs, Merrill Lynch and Morgan Stanley were all lower. Bear Stearns was particularly hard-hit.
irony can be pretty ironic, lmao, thanks for that.
Mark, very nice piece, very clearly explained.
Long straddles or long strangles at earnings for high vol stocks like GOOG, BIDU, or RIMM are almost always surefire losers.
In fact, going long BEFORE vols rise is often the way to go.
Nice article mike. The thing with OTM options is you get much more Gamma for your buck, and I believe many peole fail to realize that option prices are independent of the underlying.
you do lose more often than you win buying earnings-pumped gamma. But the occasional home run win can offset some of them.
Still, I'd rather sell them and take my chances.
gs: yeah, some just don't understand the concept of volatility in terms of how an option prices, and that the volatility is anticipatory.
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