Why do these options seem so cheap? (Is this a good buy?)

Discussion in 'Options' started by levitation, Aug 13, 2010.

  1. TSN Oct exp puts

    14 & 15 strike ones

    While the stock is up today, its hard to swim against the tide if the market is going to continue declining. Right? (stock is $16.34 now)

    weekly charts stock is in a downtrend
    Doesn't have much support, tops or bottoms, sideways levels in the $16-14.50 region. You'd have to go 2008 but even then its scarce. Much of the trading activity takes place at $14-12. If it continues declining its going to have to go to previous tops/bottoms and I'm seeing much more support at $14-12 opposed to $16-14.50

    With stock at $16.34

    oct 14 put is .25
    oct 15 put is .45

    You get about two months to expect a decline like this. If you're bearish, this seems really cheap. But is it possible since this is a food stock that it receives a flight to safety when the market is down?

    Can someone who understands the greeks explain to me why this is being priced the way it is?
  2. As a general rule... Options are "cheap" because (1) they are so far out of the money, investors believe they won't move "that much" before expiration, and (2) investors believe there is little chance in the market moving THAT direction... doesn't mean they are correct, just reflecting current sentiment.
  3. I see. Ok lets prevail with #2.

    The oct 15 put on TSN has the most volume on it then any other contract in any month/direction for the stock. And its a landslide amount. Google finance says 1251, second highest is 200 aug 17 calls.

    With options, does it pay to follow the herd? Because the majority is seeing this as a good buy while the minority is laughing at the suckers who bought it.
  4. When you're "following the herd", the option prices will reflect the herd's sentiment.. and will be high or relatively high in that direction. Prices are cheap only when the consensus believes, "probability of THAT happening" is low.
  5. i don't think you need greeks to explain this. IV of TSN and of VIX has been declining for a couple of months and both are trending down with TSN near the low end of one year range. With No news option pricing is appropraite for a $16 stock with 30 IV.