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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: rocklobster who wrote (1460)	7/12/2001 7:37:09 PM
From: Dan Duchardt	of 5205

rok, has anyone ever watched the bid action on call options to judge how much support a stock has at certain prices I've watched a lot of stock and option price action during the day; even tried some daytrading of options which is a tough game unless you trade fairly deep ITM because the stock has to make a big move just to cover the option spread. Any day a stock makes large % moves like STOR made today you can count on divergences. If it moves up strong the puts will lag because there is a lingering expectation that the stock is moving too fast and will come back down. If it drops strong the calls lag because of lingering doubt it can continue to fall. With the general market trending up like today there is often an expectation that a falling stock will get on board, and that will also prop up the call prices while put prices keep up pretty well or run ahead of the falling stock, because nobody wants to sell cheap on either side of the movement. Based on an already high historical volatility, "fair" value for the STOR JUL10 calls as of the close is .68 and for the puts it is .75, yet the call bids range from .85 to 1.05 with the ask at 1.10 and the put bids range from .80 to .95 with the ask ranging from 1.05 to 1.20. These are pretty far out of line. The implied volatilities are 175+ on the calls and almost 160 on the puts. Even though options are "derivatives" with a theoretical price structure based on the price and general behavior of the underlying stock, there are no rules that demand the prices follow the theory. It's still an open market driven by people's expectations of where the price is going to be tomorrow, or the next day, or next month. It is not uncommon when a stock price starts to get out of step with the market that the options are strongly influenced by the general market behavior as much as the stock itself. Dan

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