Re: Last bounce, 50 minutes left, Sell, Sell, Sell

["RAY RAFFURTY" <rraff@xxxxxxxxxxx>]

-----Original Message-----
From: dbtg <dbtg@xxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Friday, August 28, 1998 9:15 PM
Subject: Re: Last bounce, 50 minutes left, Sell, Sell, Sell


>I agree with your basic point re:volatility's huge influence on option
>price.
>But, the VIX closed higher today! Seems like the closing option prices on
>Thursday reflected the fact that the SP futures closed at a substantial
>discount to the cash. I was taught to look at the SP futures as the major
>determinant on OEX premiums, except near expiration.

Could you elaborate on this point?  Is there a specific mathimatical
relationship or is it a seat of the pants type of thing?

>Other than that, I know not why.... maybe option buyers
>decided the premiums were too high & they organized
>themselves into a union and called a strike (intended).


Options are affected by supply and demand just like anything else.
Sometimes we forget that it it is not the volitility that sets price but the
demand for the option.  In fact a good way to think of volility is in terms
of supply and demand.  High demand = high price = high volitility, be a
seller.  The reverse is also true.  Also, remember that if you are mesuring
volility in terms of the VIX, it is derived from only 8 contracts (The front
month puts and calls bracketing the current cash value of the OEX and the
same second month options) so it can be an imprecise tool.

>Nevertheless, this type of option pricing suggests a
>change in attitude, which might just be an indication of
>an end to the downside, at least temporarily.

Well, maby.

>I put more importance to the above than the 'oversold' indicators.
>Just as the market soared a few thousand points while
>being in a perpetual state of 'overbought', it can do the
>reverse in a few weeks or months of oversold condition.


Absolutely, the best way to make a small fortune out of a large one is to
follow "overbought/oversold" indicators.  Just ask the bears for the last 4
years or so.

                                        Good luck and good trading,
                                                    Ray Raffurty