However, with highfliers there's often a very pronounced U-shaped vertical volatility skew where far OTM strikes are most affected (i.e. far OTM calls and puts are highly overpriced).
this is part of the reason i have been successful in selling calls. when time decay begins to accelerate, the loss in the value of the option in some cases has been so dramatic that has allowed me (as a seller), to benefit. in certain cases the overpricing creates a "cushion" or margin of error, that if my assessment in price direction is wrong, it allows me to get out either at a small loss or still at a small profit. however, as you indicated earlier, the risk still exists that if an extraordinary event takes place, and moves the price of the underlying violently and unexpectedly, i will be sustaining an important loss.
...having said that...
That's why it pays to run things through a model.
you are absolutely correct and i have been more assiduous about using the toolbox from the CBOE. lately i am using the OptionScope from Metastock.
i confess to having had a more intuitive approach to the valuation of options in the past. (yes, guilty as charged). however, using these programs (particularly OptionScope) is bringing a different dimension to my trading. for one, it makes the trade less emotional, more mechanical having that "base knowledge" of what the price should be.
once again, thanks for your input.
a note of caution: the tool box specifically warns NOT to use their model for index options, here is their "warning label" and website:
The options values used in The Options Toolbox are calculated using a theoretical pricing model provided by May Consulting, Chicago, Ill. The model is used within their option software package "Microhedge" --a program developed to monitor, track and analyze option positions.
The model is a binomial model preset for American-style options. Therefore, The Options Toolbox should NOT be used to simulate prices for Indices (American or European style), or any European-style options. Cash dividends are incorporated by defining only the first ex-dividend date with all subsequent "ex-dates" set to occur at 91 days intervals.
May Consulting, Inc.,
401 La Salle Street,
Suite 1400
Chicago, Ill, 60605
Voice 312 786 5065
Fax 312 786 5070
may.com |
