GM $1 puts

Discussion in 'Options' started by SForce, May 21, 2009.

  1. SForce

    SForce

    Would anyone have a logical/legit explanation as to why, after a 44% (mkt + ah) gain today, the GM calls (rightfully) increased in price, but the $1 puts stayed the same? (The .02 they show as lost today happened before the big move up).
     
  2. It limits the ability to drive the price down and be profitable.
    It also stops you from being able to hedge yourself without selling calls which if assigned will assist in providing the market with a short squeeze
     
  3. Did GM's overall IV drop on the day you observed that price change?
     
  4. btw. is anyone contemplating shorting GM and buying the 3$ strike call as a hedge.
    someone told me that the shares are restricted and hard to short/borrow.
     
  5. Very very expensive to borrow

    Mark
     
  6. heech

    heech

    The IV on the puts are 500%+.

    The IV on the calls are 100%+.

    This reflects how hard it is to borrow. Those bearish on GM stock are instead heavily buying puts... this is also why the price of puts are staying "up" even as GM underlying climbs.
     
  7. SForce

    SForce

    Ahh.. thank you. This is the reply I was looking for.

    My broker shows the IV at 500% however I assumed 500% was the highest IV possible (yes?). If IV was no longer increasing I could not rationalize how the put would stay the same price(to even out the rise in price). I also didn't think that higher IV meant it would be harder for the put's price to move, I just figured it affected the overall price (making it higher obviously).

    Thanks for the reply, it's the only answer I could figure although some of my thoughts were just slightly off.
     
  8. heech

    heech

    I think it's important to understand that the BS model isn't always relevant...

    ... the most basic concept in the BS model leads us to conclude IV -> determines option pricing. So whatever effect happens on option pricing, we're tempted to try to figure out what "caused it" from an IV point of view.

    That's not what's happening here. Prices on the puts are being set by supply/demand, and IV just a reflection of that demand. (And we can't get back to put-call parity because no one can borrow the shares.)
     
  9. spindr0

    spindr0

    The borrow rate for GM stock has been over 100% during the past few weeks... and even if you're willing to pay that, it's a tough borrow.
     
  10. It'll really be "insane" when the put premiums are greater than their strike price! :cool:
     
    #10     May 22, 2009