ITI Trading & Pricing
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Transcript of ITI Trading & Pricing
Extrinsic Value Comparison
In-the-money Out of-the-money
At-the-money
Effects of “the Greeks”• Influence extrinsic value• Therefore, the influence of all the Greeks is greatest on the at-the-money options
Standard Deviation
1. Measuring “normalcy” of volatility 1st Standard Deviation – 68% of observation
1. Establishes high and low end of most normal readings
2. Often seen as good opportunities to sell and to buy
1st SD
Volatility Surface
A very useful tool for examining the entire spectrum of volatility across all strikes and expirations.
Reasons for Smile
1. The shape and magnitude of the skew vary with time to expiration, market conditions, and type of underlying.
Traders prefer to sell at-the-money options to take advantage of maximum time decay.
There is less liquidity for far out-of-the-money options. Market makers have more of a difficult time “getting out” or converting their risk.
Market makers demand a higher premium to sell small “lottery ticket” options.
Volatility Cones
Volatility Cones: Graphical representations of where implied volatility has been with respect to option maturity.
JKL Volatility Cone
405060708090
100110120
20 40 60 80 100 120 140 160 180 200
Trading Days
Vol
atil
ity
2nd Standard Deviation Measurements
Directional Spreads: Bull Vertical
Bid Offer9/16/201
0 NNI 22.95 23.00
Calls SEPTEMBER Puts
BidFair
Value Offer Strike BidFair
Value Offer7.60 8.00 8.40 15.00 0.00 0.00 0.105.30 5.60 5.90 17.50 0.00 0.01 0.153.00 3.25 3.60 20.00 0.15 0.25 0.401.15 1.35 1.60 22.50 0.75 0.90 1.100.25 0.40 0.60 25.00 2.20 2.45 2.70
Implied Volatility = 43