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20/12/14

10:23

Post #: 14490783
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Originally posted by Zonetrader ↑

gj, I agree with Redbacka that the implied volatility component of option pricing is the most likely cause of the problem.

I have posted a chart of the Aussie Implied Volatility below (I don't have the DAX IV charts, however the principles remain the same). Highs on the XVI chart usually correlate with our market lows. The higher IV is, the more highly priced options become.

So, if we buy options on market lows when IV is at it's high extremes, we will be paying a lot more for an option than if we buy an option when IV is at it's lower extremes. However, this can work well for buying puts when IV is often at it's lows and we think the market is likely to turn down and then the option gains in price from both direction and IV.

You will see from the chart below that IV has fallen quite heavily in the last few days which means the IV component of options would be dropping out of the option price. If the directional move is very strong, sometimes the delta and gamma (which control directional speed of the option) can outrun the fall in IV but it can still be like trying to drive with the brakes on.

Buying longer dated options on lows is even more problematic as IV and other factors affecting option pricing can behave differently further out - won't go into that now! There is so much to learning ETOs and it was a lot of hard work to get an understanding of the basics! However, hopefully the above gives you a brief overview of how IV can affect option pricing which is a start.

View attachment 35020

http://quotes.ino.com/charting/?s=ASX_XVI

Expand

I very much appreciate the thoughts on Options in this thread. There's some comments that give a good direction for further study. It sounds like IV is essential to understand.

I switched over the ETO's as my preferred trading instrument a few months ago after trading them 20 years ago without much success and swearing I'd never touch them again. But the product has been improved massively since then, with smaller contract size (100 not 1000), improved liquidity, pricing, and coverage which I only realized recently. It also suits the Internet age. I used to try and trade options using newspaper quotes and phoning a broker in the early 1990s which was hopeless!

Options are really powerful but I've realized they're a whole course of study on their own. Thanks for the direction. There's some holiday reading here for me.

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