RE: [TheOptionClub.com] Over/underpriced options

 

It is debatable of whether options are every over or under priced. Because the speed and liquidity of the market place, option prices are typically what they should be based on the forces of supply and demand. The option pricing models are just that, models. The price of an option is determined by the pressures of supply and demand. For instance, the price of the option determines the IV of that option when plugged in to the Black-Scholes pricing model. The IV does not determine the price, but is a reflection of the price. When you write or short an option, you are making an IV or time play, i.e. you are betting the IV will drop or the option will decay over time. IV and time decay are strongly related an affect the extrinsic value of an option.

 

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From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Sveta
Sent: Monday, May 10, 2010 11:08 PM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] Over/underpriced options

 

 

How much does an option have to be over or under priced to be considered just that? I put a couple of options through Black-Scholes and they were overpriced by 10 cents. Or does it have to be overpriced more then that to be considered for writing?
Thanks guys

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