Novice needs help

vladimir

Newbie
5 0
If we could predict future volatility of the underlying price changes, the theoretical prices would give buyer and seller equal opportunities over a large number of trades to average otherwise random results.

The fact that option has negative theta (its price decays with time) may seem a bit confusing, but it does not mean that selling options is more rewarding. You may loose money in a first hour after selling a put. The longer maturity time, the greater risk - higher price.

The magnitude of the underlying's move is normally taken as interest rate minus dividends or storage cost during the option's life. No prediction is involved here to price options. However, if you know something for sure about the future that gives you advantage no matter selling or buying. Otherwise, implied volatility might be a better indicator.
 

RedE

Junior member
25 2
RE: "Options pricing models are geared to favour sellers over buyers."

I do not agree. Options pricing models assume an equal probability for an upmove or a down move - the degree of movement over a given period is determined by the "assumption" about volality (thus "implied" volatility). Therefore I would say that options pricing is geared to protect the seller rather than to allow him/her a licence to print money.

If the maket (-maker) is pricing his options way too high (in your opinion) then you are free to join him in selling, thus taking advantage of the overpriced insurance policy!
 
 
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