Hi everyone, I'm starting to change my thinking of options from regarding them as a gamble that they will go in the right direction to a product being bought and sold like anything else. And like anything else being bought and sold they can be underpriced , overpriced, underbought, overbought, etc. Leading to the following question. What criteria, based on my new thinking, do folks on this board use to determine that its a good time to buy or sell. It's not ego assuming that other people are thinking of it like I am - instead what I've read and heard a thousand times is starting to sink in. Would anyone be willing to provide examples of looking @ the option and deciding to buy / sell call / put based on the values themselves? thanks - dave
1) Give consideration to trading options when you know that major scheduled news reports are pending. You can expect implied volatility (vega) to increase before a report and decline after a report. Price fluctuation of the option is slightly more predictable. 2) Give consideration to trading options during their final month of trading when time decay (theta) is greatest. You may be "captivated" by the fact that the option's extrinsic value will decline to zero. 3) If you're good at price forecasting, you can implement various option trading strategies to capitalize on the price movement (delta) that you expect. 4) An option that is "cheap" according to one trader can be "rich" according to another trader.
If you're buying or selling options outright, for the most part, you have to get the direction right... or at least not get the wrong direction right. Same hold true for neutral strategies. You have to get non direction right If you're going to trade volatility then you're going to have to get the directional correct as well. As an example of pending IV contraction, FSLR released earnings last Thurs PM. Mid afternoon, the IV's for the Feb 125p, 125c, Mar 125p and Mar 125c were 154, 151, 59 and 54 At the open the next AM, the expiring Feb options were trading near parity and the Mar 125 pair was 55 and 46 By noon the Mar pair was 44 and 43, finishing a bit lower at the close.
spindr0 - Am I correct in assuming that you would sell the Feb on Thursday and buy it back on Friday as all of the IV exhausted overnight?
You can't sell volatility just because it's high. In the example, the underlying dropped 9 pts overnight so win on IV, lose on price unless your short options were 2 strikes or more OTM.