Sunday, January 24, 2010

RE: [TheOptionClub.com] IV/VIX question

 


Thanks Micheal for answering that. I will trust you on that.

However, one last thing Im still confused about; what greek describes the bid ask spread?

If I buy option xxx for .25, and change my mind 20 minutes layer and sell it for .10, I just lost money due to the different price, due to the spread. I know that is a lousy option to trade, but this situation does exist.
Just wondering where it falls in?

Thx,

Ross

--- On Sun, 1/24/10, mcatolico <mcatolico@mindspring.com> wrote:

From: mcatolico <mcatolico@mindspring.com>
Subject: RE: [TheOptionClub.com] IV/VIX question
To: OptionClub@yahoogroups.com
Date: Sunday, January 24, 2010, 8:31 PM



The greeks DESCRIBE all the aspects of an option's price but the Greeks do not CAUSE price change. Supply and demand actions cause (or "drive") price changes which can be described by the various Greeks for various risk management purposes. There is no mysterious "ether" beyond the Greeks. 

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of rvd
Sent: Sunday, January 24, 2010 7:20 PM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] IV/VIX question

 




Esa,

I have been stating this for many months now - with no others in agreement.
But you just said it, basically.
I dont know who you are - maybe a market maker??
But if I read this right, you are saying that the greeks do "NOT" account for 100% of an options change in price. I once gave the extra influence the name ether, but I
assume that the price is also affected by supply and demand, bid / ask spread, lack of liquidity, etc.

Can you answer the question for us?

"What drives the price of an option?"

And how much of the option price is accounted by the greeks?

Thanks,
 Ross


It's called supply and demand. The demand for the near term puts is greater than the demand for the far term puts. If the market comes to believe that we will be moving into a higher volatility environment, then the back month puts will start getting pumped up. Remember, the implied volatility of an option is backed out from the price of an option. What drives the price of an option?

For this reason, back month options don't get pumped up like front month options normally do at earnings because the market believes that the volatility will dissipate after earnings come out. So the question is whether or not the market believes that the higher implied volatility is here to stay or not. The answer lies in the price of the options in the back months.

Cheers



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