In addition to using the mkt quotes rather than last prices as mentioned by Mark, it does look like the volatility maybe the culprit here. The volatility on a 30 call has decreased 400 bp, which has probably offset the stock price rise, add in time decay and you got those -0.05. The volatility on the 35 call has held steady, so the stock price rise caused the premium to rise by 0.10.
you are going to make $55.69 if you traded one lot Call Bear Spread and stock and IV stays the same. Call bear spread is a short vega, long theta position which mean it will lose money if volatility jumps and gain money when days go by. You might get all those info by just two clicks. Here is how: 1. Go to http://www.TheOptionsLab.com 2. Click on Online tab 3. Enter Symbol 'bke' 4. Click on Bear Call Spread on the left hand side. Now watch those greeks very carefully ( espically the Totals row ) when you adjust the Days and Volstility steppers. it will show $0.59 Vega and $0.98 Theta, which means for each 1% Volatility jump, you lose $0.59 and gain $0.98 after one day goes by. Good luck.
Thanks for the help guys. Another thing I don't understand is why each option has its own IV. IV is really just worked out from the difference in actual option prices between a theoretical option model's price right? If for example an option has a market price of $7 whereas a theoretical model has priced the option at $6, would that mean the extra $1 is attributed to IV? If that is the case, would that mean that IV really is just an indicator of demand for an option?
IV is not just demand, as an option will have IV in the absence of any demand. The demand for an option does indeed affect its price (not surprisingly) and pricing models place that demand into IV. In other words, IV tends to be a universal dumping ground in some sense -- much of what is unknown about an option's price is dumped into IV.
1) Each stock has its own historical volatility so its options are priced accordingly.. hence they have different prices and different IVs. 2) The option's price tells you what volatility is being implied by that price. IOW, if you know all of the variables (stock and strike price, interest rate, time remaining, div) and input them into a pricing model and solve by iteration for volatility, the answer is the implied volatility. 3) Price is the result of demand. IV is a function of price so tho it's a stretch, I suppose you could say that IV really is just an indicator of demand for an option?
NO NO NO! That is NOT a stretch! Is it a stretch to say that the price of IBM is really just an indicator of demand for IBM? The relationship between IV and an option is EXACTLY the same as the relationship between price and a stock. A measure of demand. That's it. http://masteroptions.com/?p=3
IV IS just demand. It is nothing else. In the absence of demand, an option will in fact not have any IV. That may not be obvious, because the exchanges will always display an offer of at least 1 tick, so the IV will be calculated off the mid-price between the bid and the offer. Today for example the GS 70 puts with just 17 days remaining closed at 0 bid, .04 offer. The "mark" is thus .02. So the TOS platform (and every other platform I presume) dutifully calculates IV using an option price of .02, and comes up with an IV of 138%. Since that "mark" price is fictitious, so is the IV that it generates. Garbage in, garbage out. An option such as that one, with no demand, has a true price of zero. And an option with a price of zero has no IV. People seem to be foggy on what IV really is. It's so simple. IV is to options what price is to stock. When demand for a stock goes up, so does the price. When demand for an option goes up, so does the IV. If this is not crystal clear please watch the video at http://masteroptions.com/?p=3
That's really great! I think you're going to re-write (aka re-invent) the foundation theory of options pricing! Thanks! http://www.elitetrader.com/vb/showthread.php?s=&postid=2528607#post2528607
Sophistry. I view demand as actual order flow -- real buying or selling pressure. Even in the absence of any order flow (demand), market makers are required to quote reasonable, two-sided markets. Those quotes imply vol. Your example of a of a 70 put on GS being zero bid is hardly proof of anything. The option is 95 points away from the market and soon to expire. That there is no public or market maker bid for that option is not proof that IV is demand. Look at the AUG 102 puts on XSP. They have no open interest and did no volume today. I read that as no demand. The market appears to be somewhere around 2.56-2.84. Those prices imply vol of about 21-22%. quod erat demonstrandum.