Hey ETers, I pulled up a quote on one of the more volatile stocks of the day, Amarin PLC (AMRN), and saw something peculiar which puzzled me greatly... If you look at today's quote of AMRN at 10.50 and then examine the 7 puts and 14 Calls (which are equidistant by $3.50) it looked a bit odd to me. I thought that GENERALLY speaking if you compare two equidistant options in which one option possesses a higher IV and assuming no cost of carry issues (i.e. dividends or borrowing (HTB)) the option with the higher IV should posses the greater premium. Yet in this instance the call has a lower IV yet commands a greater premium while the put possesses a greater IV but its premium is lower. I'm assuming it has to do something with the idea that in theory the stock can go to infinity whereas the put is bounded by the lower limit of zero therefore the call has a greater value. Another odd thing for me was seeing that despite the higher IV on the 7 put it had a lower delta as opposed to its 14 call counterpart? If anyone could clarify this for me I'd greatly appreciate cause I'm now really beginning to question some of my central tenets behind my options knowledge P.S. Based on this montage for April what could one say about the options markets' perception regarding the bullish/bearishness about AMRN? Initially I thought with the higher vol on the put side it would imply bearishness BUT given how similarly distanced calls are trading at a premium in terms of price (not vol) I'm at a loss... Thanks in advance
Your basic idea about convexity is correct, though I didn't look at the specific options you mention. Why don't you plug your market data vendor's IVs into a simple B/S calculator and see if you get the right market prices -- would give you confidence in their calcs, and a better feeling for how B/S works.
Rodney, Thanks for the reply. I did plug in the values and got roughly the same market prices on the montage so I'm confident in my broker's IV calculations and got the same results. Still confused Oh well
1) Biotech stocks with gigantic levels of implied volatility can be "goofy". :eek: 2) The bid-ask spreads for those options can be wide enough to "distort" the values you expect for the implied volatility. 3) One of the option's I.V. may have been calculated from a trade done on the bid and the other option may have been done on the offer creating the appearance of a "distortion".
Thanks Nazz I love your emotes 1.) Wholeheartedly agree. 2.) Seems reasonable. 3.) Usually the the way TOS calculates IV values is by taking the mid of the bid/offer and then backing out the IV. I used TOS' IV levels into Interactive Broker's Option Pricing widget and got similar numbers as to what Thinkorswim was showing.
http://www.888options.com/resources/literature/options_central/2011_summer.pdf Page 3 in the link above may help answer your question. IMHO If the distribution is symmetrical, the equidistant put and call shoud have the same premium. The demand or lack of can create an asymmetrical distribution which will make put\call premiums differ.
Thanks for the information and link. Seems my initial hunch on the stock price distribution may be the underlying cause for disparity. I do recall reading Augen's book entitled "The Option Trader's Workbook" in where he asks between the call or put with same vol and same strike price which should have a greater price? Answer was that the call in theory had unlimited upside (i.e. stock can goto infinity) whereas the put did not (limited to zero).
While logmoneyness does affect this I believe the source of the difference are interest rates and dividends.