Herman,
First let me thank you for starting this thread. I appreciate your comments and thinking about implementing option strategies. As a from-the-beginning-lurker on this thread, I have particularily appreciated this resource, as it has supplemented my own interests in taking advantage of the opportunities in options.
I have read most all of the books on options that have been mentioned here and a few more as well. I find that it is not possible to know too much. (I am not sure if anyone has mentioned Sheldon Natenburg's "Option Volatility & Pricing". I found it very useful for me, though possibly a little mathematical and dense for those not inclined toward mathematical analysis.)
With all of that said, I have a question about how you determine which price for options you will accept and which you will pay. It is not clear that you rely necessarily on say a Black-Scholes, et al. model for determining fair value, or whether you operate on what "feels" right or a combination of both (or neither for that matter).
It has seemed to me that in looking at the spreads in bid-asked for the options prices, they are not always in line with the theoretical values. Especially when the stock is moving. I have thought that this can be accounted for by adjusting in some cases the volatility. Or a lag in prices catching up or overshooting the move. But in many cases are really accounted for by "market conditions" or the thinking of the investors out there assigning their valuation of future value. Or more cynically the Market Makers manipulating. So another way of phrasing what I am asking is how do you make these kinds of adjustments to get the most out of your trades? Or do you just not worry about it?
I am somewhat familiar with your consideration of the VIX and the more common sense strategies of buying back calls when they reach those 25% thresholds, but I guess my question is looking beyond the macro strategy you are pursuing, to the more practical consideration that say "Ok I'm going to write a call on this baby, APR on-the-moneys are at 1 1/4. Is this the right one, or is further out or closer in better. Or deeper in-the-money, or out of the money. (I'm assuming the strike above the "nut".) Or should I wait or should I take market?" Sort of in the same sense that when you play poker, you can follow a straight odds strategy, in which case a good player (the market) can eat your lunch, or you mix it up and be a good player yourself.
I am having a little difficulty putting my finger exactly on what I am asking, I guess, because it is not really covered in the books. Surely there are the various strategies, repairs, hedges, double butterflies and triple dragons [exaggeration] and the rest, but they don't really seem to address that moment of truth when you are submitting that bid, and whether you should be waiting for a better price, settling for a lower price, etc. This comes with experience, I'm sure, but I would appreciate any comments or light you could shed beyond this observation.
Ultimately it seems to me that you have to get down to making a "judgement", hopefully on the basis of the best and most current information available, but a judgement all the same. If you can offer some insight on your judgement process and your experience here, I would be quite interested, and perhaps there would be others that would benefit as well.
I apologize to all for the length of this post. It got away from me. But I guess it reflects my own difficulty in asking a qualitative question about a predominately quantative subject.
Once again, thank you for your thoughtful responses to this thread. I look forward to your response. |
