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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: ---------- who wrote (632)	1/29/1998 9:21:00 PM
From: Roman S.	Respond to of 2241

Got it. Thanks again.<eom>

To: ---------- who wrote (632)	1/30/1998 1:13:00 PM
From: Esteban	Read Replies (2) \| Respond to of 2241

Can anyone explain the reasoning behind the following option pricing based on a quote I got this morning? I don't believe this is unusual, I just don't understand why options of different strike prices are priced this way. OXHP bid 14 3/8 ask 14 1/2 MAR 15 put 1 5/8b 1 7/8a Implied volatility 75% MAR 17.5 put 3 3/8b 3 3/4a Implied volatility 84% If one sold these two puts and at expiration the stock price is unchanged from today, the MAR 15 nets 1 1/8: 14 1/2 - 15 + 1 5/8 and the MAR 17.5 nets 3/8: 14 1/2 - 17.5 + 3 3/8 If the stock price at expiration is 16 the net from MAR 15 is 1 5/8 and from the MAR 17.5 is 1 7/8. At 13 stock price MAR 15 nets (3/8) and MAR 17.5 nets (1 1/8) Sum of these three scenarios for MAR 15= 2 3/8 and MAR 17.5= 1 1/8. My question is with the higher implied volatility, why do the MAR 17.5 significantly underperform the MAR 15 in the most likely scenarios. Even if you include a move to 17 1/2 (MAR 17.5 greatest gain) and its inverse move to 12 7/8 the MAR 15's still come out ahead when summing all of the above outcomes. Esteban