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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Oeconomicus who wrote (3923)	3/3/1998 1:10:00 PM
From: TAPDOG	Read Replies (5) \| Respond to of 18691

Concerning options valuation. I am surprised that I find almost no discussion of options volatility or valuation on any of the SI threads. It is rare that anyone says, for example, that AMZN puts are over-priced or under-priced or fairly priced. I assume that we are not all in total agreement about what implied volatility should be. After all, buying or selling an option is a bet on the future volatility of the underlying stock as well as the future price. I read postings where much thoughtful analysis goes into determining that a stock is overvalued but then the trader arbitrarily buys puts without any analysis about its valuation. Which leads to my question to anyone: does anyone know of an inexpensive program or a website that provides implied volatility for stock options?

To: Oeconomicus who wrote (3923)	3/3/1998 3:20:00 PM
From: Pancho Villa	Respond to of 18691

>>Sorry for the long, off-t, theoretical post folks, but I actually do have a point. That is that a systematic overpricing of put options may, on the surface, look like excessive fear or bearishness, but in reality may represent complacency or a lack of fear among equity investors.<< Good post. IMO, puts may be rightly priced after all. Volatility (price variability) may not be the right (only) measure of risk. Pancho PS: you are making it to my people's marks

To: Oeconomicus who wrote (3923)	3/3/1998 4:43:00 PM
From: Gordon A. Langston	Read Replies (1) \| Respond to of 18691

Re: Overpriced put options. Newton is always pictured sleeping when the apple hits him in the head so its not so odd that you have come up with these observations in a similar way. Very good post.

To: Oeconomicus who wrote (3923)	3/3/1998 6:20:00 PM
From: Bilow	Read Replies (2) \| Respond to of 18691

About those over-priced put options... If you really believe an option is over-priced, you can make money selling it. The market makers are required to make a market for them, which means they are prepared to buy them from you as well as sell them to you. So over-price options don't exist, at least without similarly over-priced call options. The reason is that there is a simple arbitrage between them that would be a money mint if the puts and calls are not priced equivalently. "Priced equivalently" means having the same time premium for a given strike and date. The time premium is just the cost of the option minus the intrinsic value. The intrinsic value is the amount the option is "in the money", or zero if it is out of the money. Lets do a little example. In order to make bucks off of over- priced puts and under priced calls, just buy the call and sell the put, then hedge by selling short the underlying security. Similarly, if the calls are over-priced, just sell the calls, buy the puts, and hedge by buying the security. In either case your postion is riskless if you hold to expiration. Example: Closing prices of Amazon today: AMZN Closed at 71 3/4 ZQNVM October 65 Put, AMZN, closed at 11 1/4 x 11 3/4 ZQNJM October 65 Call, AMZN, closed at 16 7/8 x 17 3/8 cboe.pcquote.com Buy the call @ 17 3/8. Sell the put @ 11 1/4. You are out $612.50 per contract. Short sell AMZN at 71 3/4. Now wait until the October expiration. If the stock closes at 65 in October, the put and call both expire worthless, and your short sale returns 71 3/4 - 65 = 6 3/4 = $675.00 If the stock closes at 70 in October, the call will be worth $500, the put is worthless, and your short sale will be worth $175, for a total of $675.00. Similarly, if the stock closes at 60 in October, the put will be worth ($500), the short sale will return $1175, and your position will be worth $675. In other words, you have locked in a return of $675 with an investment of only $612.50, for a profit of $62.50. (Unfortunately, commissions have eaten you alive. :) Anyway, puts and calls can be arbitraged against each other for riskless cash if they get too far out of whack. But don't worry, the market makers would eat each other alive to make those riskless profits, and they don't have commissions, so you're not going to make any money this way. :( By the way, I sold my AMZN puts today for a tidy 2-day return of almost 10%. Unfortunately, this is less than I would have made short selling AMZN on margin over the same interval. The real problem with options is the illiquid market, the high commissions and spreads, and (for the buyer) the high time premiums. But these are problems for both the put and call purchaser. -- Carl