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WOW.... so much to clear up here. I'll reply to the whole gang because this
gets so many beginners so confused at first.
Follow down, as I'll respond in the body of this inquiry;
-----Original Message-----
From: George Van Noy <jorxj@xxxxxxxxxxxx>
To: deltaforce@xxxxxxxxxxxxx <deltaforce@xxxxxxxxxxxxx>; RealTraders
Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Thursday, August 20, 1998 11:28 AM
Subject: Re: market/oex update: NOT hindsight
>David,
>
>Can you further elucidate your meaning that further ITM options have more
>octane? i.e. more movement, therefore more profits, and/or more loss?
--- To understand this, you really need to get a grasp on what "Delta" is.
Of course you know that options don't actually rise and fall by themselves,
but are tightly leashed to the underlying market they are written on
(advanced options traders, bear with me here... let's keep it simple.)
"Delta" is the percentage difference between how fast the asset price
changes and it's attached option prices change.
An ATM option has about a 50 Delta. This means that for every tick of
movement of the asset, the option price moves 50% of it. SO, a $1 movement
in the asset up or down will result in a 50 cent movement in the option
premium, in the same direction as the asset.
An ITM option (let's say 2 strikes ITM) will have somewhere around an 80-90
Delta (let's be flexible here.) That means a $1 move in the asset will
result in an 80-90 cent move in the option, up or down, in the same
direction as the asset. Options that are less ITM will have maybe a 60-70
Delta. As you can see, the deeper ITM, the "higher octane" the option.
An OTM option (again, let's look at 2 strikes OTM) will have maybe a 10-20
Delta. So a $1 move in the asset will only create a 10-20 cent difference
in the option premium.
REMINDER: Don't confuse Calls and Puts! Call Strikes are ITM when BELOW
the current asset price...
Puts are ITM when ABOVE the current asset price.
>My question derives from looking at, for instance today's OEX puts and
their
>current range. The OEXUN put at 470, way OTM, had a 33% range from low to
>high, whereas the OEWUH put at 540, almost ATM, had only a 18% range, and
as
>you go into the ITM puts the percentage range was less and less. I'm
>calculating these percentages strickly based on money in ratio to money
out.
>Isn't that correct? So on this basis, the very OTM OEXUN had a much better
>return on investment if gotten in near the low than the ITM puts. And this
>particular put, OEXUN has a sizable OI also.
--- What has most likely occured in your observation is that this large
swing in the 470 put came from the floor creating massive slippage...
basically manipulation... because of the illiquidity of that particular
option due to being so far away in strike from the asset market. The floor
saw the orders come in from the large Open Interest, and saw opportunity to
scalp the hungry-to-exit public traders. In fairness to the floor-traders,
they're widening the bid-ask spread to cover their own butts from the risk
that occurs in an illiquid market (far away from the ATM market.)
Hope this helps a bit,
Good Luck, and Great Profits,
Dave Donhoff
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