Aaron,
<<Sometimes, when I want to establish a hedge, I notice that the implied volatility perks up since everyone else has the same idea (or maybe the writers just pull in their horns a bit)! >>
Of course, you're right, supply and demand obviously influences premium and people do tend to get similar ideas at similar times. BTW, it's worth noting and occasionally useful that the total volatility pricing component of a set of puts and calls with the same strike and expiration remains the same and just moves back and forth between the put and call. This obviously has to do with people's aggregate behavior, either on balance writing or buying the puts or calls. In other words, the "temporary inflation of time premium" that you talk about is only on one side of the put/call set. The other side will show a reduction. This is all pretty arcane stuff.
BTW, there are hedging formulas around that show you how to completely neutralize a portfolio--delta, gamma, theta (we
should start a fraternity) neutral using options. It sounds like you've looked at some already. I think the CBOE has some
freebie pamphlets that cover the subject.
Best,
-Steve |
