I think there will NOT be a vola "adjustment" when markets reopen All things being equal ( S&P will follow DAX) , longs need to hope that DAX continue downtrend tom and shorts need to hope for a reversal Diff story for stocks that still reporting this weekâ¦the vola will open at much higher levels than on Friday
I wonder how my 665/680/695 google weekly fly will do tomorrow assuming the stock does not tank too much.
the market closure will not affect OPtion at all. the price is decided by the moment's supply and demand, primum/time decay just can be ignored. the price on last friday doe not consider the SANDY and closure. that is the beauty of the market. becuase of this unfactored in thing, someone who bets right must harvest. if everything on the table, no one can make a dime. if you bought last thursday, the option overnight is closed, this is the same case as Sandy closed Monday/tuesday. there is nothing here to discuss.
Sorry about the poor English and punctuation. I was just getting at the fact that the ability to fairly price and optional frictionless hedge is speculation in of itself... Your still forcastingfuture volatility as one of your assumptions. Unless i hear you wrong... Frictionless meaning continuous.. Meaning like the absense of liquidity problems, jumps, and the like? I've read according to the academics. . IE Merton and the gang.. That when a option is fairly priced no money can be made from delta hedging.. this would be true in a perfect lognormal mean reverting world.. I speculate the demand and supply being the driver of prices would create mispricing on the regular. Just like mis pricings in stocks or houses or any other medium of value. I am on my cell phone typing alot of times and its very hard to type..
So you can judge your risk by your theta value along? This statement i made was just looking at trading options from the perspective of volatility not price. As if you were sitting there looking at quotes of implied vols not price. Such that your buying the inferred future distro and scalping the realized. Or selling the future distro that the options imply and then hoping to bleed less from hedging then the credit recieved from the sale of the options. Fair value ends up being what the options should have been priced at given the volatility that was realized. But i hear fair value in relation to options prices at the current time.. How can one know what the fair value really is before the options life is realized. Is this just a term used to describe the the pricing model says it "should " be..?
Well no, in vanillas you'll need more than theta. You can be priced outside the wings of a portfolio and have a neutral theta and a huge amount of bleed (delta decay). I don't mark to gamma as I prefer a dollar figure (theta), but I look at the gamma in individual positions. I watch rho on longer duration stuff of course, but only in the sense of arbs (short box, rolls etc.) and LEAPS.
The key Greek really depend on the type of stuff in of your portfolio. On one side, the index book I used to run at the Evil Firm had an average duration of 7 years, so most of my concerns where vega and funding. In fact, you start playing all sort of games around the quality of collateral, exchange funding vs internal funding etc. On the other side, the book I ran most recently was mainly variance and VIX, so there I was mostly concerned with theta and gamma, vega being a bit secondary. I really think that The Key Risk Metric is theta, since it shows if you are long or short risk premium. If you are paying theta, chances are you have some sort of protection. If you are receiving theta, you probably are short risk.
My non expert view on this is that the value of the option should be model indepedent. If you consider all the possible paths that the stock can take during the option lifetime, on expiry their value will be either 0 or a positive quantity. If you take the average payoff for all these paths then you have the value of the option (you also need to convert to the present value). The problem is that there is an infinite number of possible paths and each one has a different probability to happen (which you need to weigh in to calculate the average payoff). In practice the fair value reflects the point of view of a risk neutral investor who only cares to make the minimum profit in the long run without taking risk. But there are investors who are ready to take risk in exchange for extra profit and others who are not happy even with the risk free rate reward. For example most ppl would immediately take a $100 bet on a fair coin with 1.2:1 payoff but not so on a $1,000,000 bet What REALLY happens in practice ... I wish I knew.
Am I wrong in thinking that the 665/680/695 goog weekly fly I bought on friday will increase in value (assuming the stock doesn't tank or go up too much) because of theta decay? Because the stock market did not trade on monday and tuesday, the fly, when it opens tomorrow, will trade like two days have passed. I am thinking that even if implied volatility goes up tomorrow, theta decay should still allow me to make money. I always thought that options decay faster as expiration gets closer. Of course, I understand that if implied vol goes up big tomorrow, I may not make as much.