Why might a deep ITM call have a low implied volatility?

Discussion in 'Options' started by Alex the Great, Feb 26, 2011.

  1. Why might a deep ITM call have a very low implied volatility? Don't deep in the money options tend to have a higher implied volatility due to the fear of extreme events?
  2. No they have lower implied Volatility because if something happens say for instance I buy a Goog Call Contract 450 or whatever. If goog happens to go down say 30 dollars from it's current stock price I would not be affected of no losses and etc... But Just because u buy a deep ITM doesn't mean you can profit. You can still lose when buying a deep ITM due to not enough price gain of option contract which you will need more of a huge price gain in deep itm option contract then atm option contract. Btw Option premium is going to kill you if it's deep itm.
  3. nate,

    What are you talking about? That is 100%wrong. A deep in the money call will move basically with the stock. Now if you take a high flyer, buy the deep in the money, sell an out of the money, or even if you are more adventurous a 1 by 2, then by a put underneath and a call above that you may have something. But what you sayeth is 100 % falseth.

    Although, if you take into consideration current monetary policy and the ppt and the Bernake factor, all long instruments have no risk and therefore should have a low iv. This statement is meant to be sarcastic.
  4. spindr0


    ITM and OTM options tend to have higher IV (put-call parity) than ATM, creating a volatility smile. But that isn't always the case as market events result in frowns, smirks, forward skew, reverse skew, etc.
  5. Using DITM is one of the method to trade direction, however, this is not the "edge".
  6. dmo


    Deep ITM options trade seldom, so the posted IV's are often inaccurate. Look at the same-strike OTM put - that will give you a more accurate IV. Due to put-call parity, the same-strike puts and calls should trade at the same IV.
  7. He was talking about deep itm (Volatility). Sorry for if you understood me wrong. I understand your concept but that what he was not asking for. I was writing about the concept of Deep ITM Volatility. Oh yea BTW if you want to buy a deep itm. You'll have a better chance of doing LEAPS than that. Because DEEP ITM contracts pretty sure have a higher option contract pricing you might make money but I can guarantee you the Commison fee's is going to kill your profit.
  8. rew


    You are bringing up issues that are irrelevant to the question posed by the OP. (You are also making some misstatements -- commissions are the same on deep ITM options as they are on ATM options.) A deep ITM call should have the same IV as the deep OTM put at the same strike, by put-call parity. We expect IV to be bigger for far OTM and far ITM options than for ATM options due to the fact that real price returns have fatter tails than a normal curve. So the OP was asking why he was seeing some deep ITM call with lower IV than the ATM options. As dmo pointed out deep ITM options are illiquid and have wide bid/ask spreads, so the "price" upon which the IV is calculated is often inaccurate. The puts at the same strike will give a more accurate measure of IV.
  9. Oops you guys are correct. I just looked at my Trading platform and turned it where i can see the contract volatility and it was higher but i always read in the books that atm Volatility is the highest then once you go deeper itm it gets lower or i might of misunderstood his concept. But anyway they have one contract that will expire worthless and have no volatility at all I wonder why. But it been awhile since I bought deep Itm contracts usually I just buy leaps or day trade options. BTW I never said commison were going to be different I said they were going to eat your profit due to the option contract price meaning that you will make less of a profit then buying something that's atm option. But here's the picture.

  10. spindr0


    ONNNNNK! Not true. Wanna quit while you're behind? :)
    #10     Feb 27, 2011