Option pricing... what is fair value? How do you know?

The cost is not relevant to me. It's the moneyness or premium value inside the spread that's important. If I'm not getting paid a higher percentage of the spread I'm less interested in the trade. My >50% of premium collected helps me estimate the "fair value" OP of the spread/options to my way of thinking.

 

Fair value for an option is best understood in terms of synthetic replication cost. Market makers as a rule don't bet directionally (although they may have views, tilt the book and not perfectly delta hedge), but rather have a view on future realized volatility, skew, jumps, dividends, financing costs, events, etc. and will quote the option around its synthetic replication cost.


If you use options for leverage or downside protection to bet directionally you would not care about the synthetic replication strategies the market makers use (given they have economies of scale, exchange membership, portfolio level exposures that cancel each other etc. and off limits to a retail trader). The option price where it makes sense to put the trade on depends on your particular trading strategy and trading objective.

 

It’s cheap while you make money.
It’s expensive while you lose money.

 

Options are insurance.

If something is expected to be Volatile or high risk...then that price will be reflected on the options contract you buy, the premium factored into it

The trick in trading is getting ahead of the information curve, the general dumb herd

Earnings quarterly reports and major economic announcements are an obvious time when options will be higher inflated
If you can buy in, read, at normal times before a tide curve change will happen..that's when you can make some bank

Or vice versa, if choosing to sell options insurance for that premium collected

 

Perhaps the best comment I've seen in awhile, and certainly the most informative response from you thus far. (I mean that as a compliment, Mr. Sarcasm, so calm down. )

 

Scataphagos, the fortune teller, is now dipping his head into the options trading world?

Get ready for some price action bulshit applied to options. Specially when you guys have encouraged him to look at that.

 

Not just any price action, but price action in the rearview mirror. You need to get the facts straight.