call options during a crash

spintron · May 2, 2011

Hello,

historical options data are not available via free providers (yahoo finance etc). So I would be thankful if someone could answer this.

during the '08 crash, the general concent was that the chances of S&P 500 recovering any time soon are next to nil.

However volatility was also huge (directional though, downwards). B-S tells that when volatility rises, then the price of a call rises.

On the other hand, I'm not sure it makes sense for call options to get more expensive in a crashing market, as the chance of being in the money is next to nill.

What actually happened to S&P call option chains during the crash?

Thanks,

K

anley · May 2, 2011

Their prices would have gone through the roof because of the volatility.

etem_tezcan · May 2, 2011

I was not watching option prices during '08 crash but I can assure you that call option prices also surged. One can construct synthetic puts by buying a call option and shorting the underlying future. For that reason, call and put prices go hand in hand, otherwise arbitrage trading kicks in and creates activity to readjust them

spintron · May 2, 2011

Thanks for your replies, indeed the put-call parity arbitrage argument makes perfect sense for the S&P.

However what would happen to calls of individual companies, where default risk enters into play, how would that change the synthetic replication?

Martinghoul · May 5, 2011

Doesn't matter... Put-call parity is a fact of life (with a few notable caveats).

dmeista · May 24, 2011

Hi Spintron,

I traded options on financial stocks in 2008 so I should be able to tell you what happened. There were 2 effects: 1. volatility rose dramatically 2. the skew increased a lot. If the ATM put had a volatility of for example 70 (crisis) the OTM puts had a volatility of 100 and the OTM calls had a volatility of 60.

So to come back to your question, I'll give an example.

Example: stock is trading at 20, you bought the 24 OTM call at 0,20 which equals a volatility of lets say 23.

Now the crash comes and the stock is trading at 10, now your 24 OTM call has a volatility of maybe 60 but it only relates to a value of lets say 0,02 because the call is much more OTM then it used to be.

So yeah, your call is relatively (not absolute) more expensive, but you still lost on the trade because the option is now far more OTM then it used to be.

spintron · May 25, 2011

Thanks for sharing this

dmeista said:
Hi Spintron,

I traded options on financial stocks in 2008 so I should be able to tell you what happened. There were 2 effects: 1. volatility rose dramatically 2. the skew increased a lot. If the ATM put had a volatility of for example 70 (crisis) the OTM puts had a volatility of 100 and the OTM calls had a volatility of 60.

So to come back to your question, I'll give an example.

Example: stock is trading at 20, you bought the 24 OTM call at 0,20 which equals a volatility of lets say 23.

Now the crash comes and the stock is trading at 10, now your 24 OTM call has a volatility of maybe 60 but it only relates to a value of lets say 0,02 because the call is much more OTM then it used to be.

So yeah, your call is relatively (not absolute) more expensive, but you still lost on the trade because the option is now far more OTM then it used to be.

tripleogstar · May 29, 2011

one thing no one has mentioned is if you wanted to benefit from this increase in vol you would need to be delta hedged. The reality is during the crash, skew and vol went spastic bid, so as market makers tried marking their puts correctly by raising their skew parameters, their call vols (OTM calls) would have gone lower. In fact, if you wanted to make money in that scenario you would have needed to be long 1x3 or 1x2 OTM puts spreads (short the one long the 2 or 3), so as the market ran down towards your short strike your puts that your long 3times more of would have gone really bid and you would clean up. Till this day traders are using these strategies to hedge their tail risk, this is evident in the massively steep term structure in the SPX vs say the DAX index.

call options during a crash

spintron

Junior member

anley

Senior member

etem_tezcan

Junior member

spintron

Junior member

Martinghoul

Senior member

dmeista

Junior member

spintron

Junior member

tripleogstar

Established member

Similar threads