|
PureBytes Links
Trading Reference Links
|
Hi Colin,
who gave you the idea that the assumption you mention is generally accepted?
It isn't, except perhaps by some system promoters who would have you write
naked options.
As you surmised, time decay (usually measured by theta) depends on many
variables, the most important being future volatility, price of the
underlying, and of course time to expiration. Given these inputs, a good
option model can give you an estimate as to the probability (read: probable
frequency) of your option expiring worthless.
Let me add some gratuitous advice here. In practical trading, probabilities
like these are to be used with great caution and much rugged common sense.
Even a naked option that does expire worthless can cause the seller great
harm while it's still alive. *Never* play for premium with unprotected short
options. Remember the recent cases of AAPL, EMLX, or PG, when Put options
that were almost worthless the previous day lost hundreds of thousands of
dollars for the option sellers overnight.
Regards,
Michael Suesserott
-----Ursprüngliche Nachricht-----
Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
Gesendet: Thursday, May 24, 2001 16:49
An: Omegalist
Betreff: need some ideas to (dis)prove an assumption
I'm searching for ideas on how to corroborate a generally accepted
assumption that option premiums decay faster than an underlying may change
in price (in relative terms). For example, given a stock priced at $50 and
its 55 call with 30 days to expiration priced at $1.00, how many times does
the option expire at a premium of $0.00 and how many times does it expire
with an intrinsic value. I'd expect underlyings with different volatility
levels to have different stats, but that may be proven to the contrary.
Thanks in advance.
Colin West
cwest@xxxxxxxxxxxx
303-785-1702 (direct)
|