Options for Rembrandt, page-2

I ain't no Rembrandt ... but what the heck ... Mum used to say I had a nice smile.

Hello Andrew,

Hmmm.... interesting ....

The only riskless strategy that I know of involves the use of options to simulate a long or short position in the underlying and taking the opposite position in the physical. Unless you have stumbled across an extraordinary arbitrage opportunity, there is absolutely no risk that your broker has the bigger smile.

Speaking of smiling... the volatility smile! There is a tendency, at any given point in time, for options further from the money to have higher implied volatilities than the ATM option with the same expiry. Hence a U-shaped plot with volatility on the y-axis and strike-price on the x-axis.

While we have a single value for historical volatility based on a single underlying asset, there is a whole range of implied volatilities for that same underlying. Which to choose? At-The-Money? But that's a moving target, so it would be a mistake to focus on one particular option series - it could be well in or out of the money before you can say ... well, um ...ouch!?

Enough for now. Looking forward to the painter's return.

GK