Ed,
I had an interesting situation today on BRCD, a stock I have been dabbling with trying to capture premium any way I can get it. One of my quote services gives an average implied volatility of 95%. When it started to collapse from just above 33 this afternoon, I sold an AUG35 put at .90 and thought I had caught a good price on it. I figured I might hold it till expiration, but BRCD has been an animal lately and is reporting tomorrow, so a quick profit on a good move was attractive also. As it was falling to below 32, I was watching the "fair value" based on the 95% drop to as low as about .35, and most of the bids staying about .10 or .15 above fair value except for CBOE who at some points in time was bidding twice fair value at .70 to .80. Needless to say, I was not delighted. I finally managed to cover at .65, but that's a long way from the .35 "fair value" target. As I write this, CBOE is bidding .65 with "fair value" at .37.
Now I know I got better than fair value at the sale, but I thought it was because I caught a good price, and would have a chance to sell nearer to fair value. At 33.25, the AUG35 put at .90 had implied volatility of 132%. At the low of 31.65, the bid was still at .60 and that equates to 149%. At the offer I managed to hit, .65, it was 155%. Turns out my entry was not so spectacular as things evolved, but I'll take the little profit. If I had the nerve to hold it to expiration I'd be happy for getting the "good" price, but in the near term I wound up paying for a lot more volatility than I sold.
Something very similar was undoubtedly going on with the AUG30 puts, but I was not watching them so closely. If I had been, it would be a good example of what you are talking about. Even now the best bid of .85 is over twice the fair value and represents a volatility of 154%. If I was more confident about the earnings, I might have sold them. I do have some short SEP30 puts I will roll out if things do not go well.
Dan |
