Option pricing question

Discussion in 'Options' started by chrismontez, Jul 16, 2008.

  1. I've been buying shares on a stock that is trading around $2.50-$3 and selling the Jan 10 $2.50 calls for 50% of the price of the stock. That seems like a good return if the company stays solvent. But from my experience getting 50% of the stock price for an ATM leap 18 months out seems unusual. Any insight?
  2. 1) Which stock are you trading?
    2) In a nutshell, it would appear to be that implied volatility levels are extremely high in anticipation of a bankruptcy announcement.
    3) Because of that, the option's premium with respect to the underlying share price would create the appearance of a buy-write with a "high" rate of return.
    4) In the event of a bankruptcy announcement, the stock and the implied volatility should both collapse.
    5) There may be a lot of vulture funds that are buying low-strike calls as part of a restructuring "play" that's keeping those premiums firm.
  3. ETFC -Etrade