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Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months)...

Date post: 13-Aug-2020
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Vola%lity
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Page 1: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Vola%lity  

Page 2: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Vola%lity  

•  Vola%lity  is  a  measure  of  the  range  that  the  underlying  stock  has  fluctuated  over  a  certain  period  of  %me  –  Important  component  of  the  pricing  model  –  Helps  us  determine  which  op%ons  to  select  

•  Historical  or  Sta%s%cal  Vola%lity  –  The  actual  measure  of  how  the  underlying  asset  price  fluctuates  over  %me  –  Annual  standard  devia%on  of  the  stock  price  

•  Implied  Vola%lity  –  How  much  the  marketplace  “implies”  or  expects  the  underlying  stock  price  

to  fluctuate  –  Reflected  in  the  actual  op%on  price  

Page 3: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Vola%lity  -­‐  con%nued  

•  Vola%lity  is  a  measure  of  the  risk,  uncertainty,  or  variability  of  the  underlying  stock  

•  It  is  the  most  subjec%ve  component  of  the  pricing  model  and  oFen  difficult  to  determine  

•  The  higher  the  vola%lity:  –  Greater  the  expected  stock  fluctua%on  –  in  either  direc%on  –  The  higher  the  price  for  all  op%ons,  calls  and  puts  –  Most  no%ceable  with  ATM  op%ons  

Page 4: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Vola%lity  and  the  Op%ons  Pricing  Model  

Calcula%ng  Op%on  Price  with  known  historical  Vola%lity  

Calcula%ng  implied  Vola%lity  with  known  Op%on  Price  

Stock  price  Strike  price  

Time  to  expira%on  Vola%lity  

Interest  rates  Dividends  

Stock  price  Strike  price  

Time  to  expira%on  Vola%lity  

Interest  rates  Dividends  

Op%on  Price  

Op%on  Price  

Page 5: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Example:  ABC  Jan  11  Calls  and  Puts  Low  Vola%lity  stock,  2  months  to  expira%on  

Stock  Price:   50.00   Expira%on:   2  months  

Strike  Price   Call  Status   Op%on  Price   Intrinsic  Value   Extrinsic  value  35   ITM   15.10   15.00   0.10  40   ITM   10.30   10.00   0.30  45   ITM   5.80   5.00   0.80  50   ATM   1.60   0.00   1.60  55   OTM   0.80   0.00   0.80  60   OTM   0.30   0.00   0.30  65   OTM   0.10   0.00   0.10  

Strike  Price   Put  Status   Op%on  Price   Intrinsic  Value   Extrinsic  value  35   OTM   0.10   0.00   0.10  40   OTM   0.30   0.00   0.30  45   OTM   0.80   0.00   0.80  50   ATM   1.60   0.00   1.60  55   ITM   5.80   5.00   0.80  60   ITM   10.30   10.00   0.30  65   ITM   15.10   15.00   0.10  

Page 6: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Example:  XYZ  Jan  11  Calls  and  Puts  High  Vola%lity  stock,  2  months  to  expira%on  

Stock  Price:   50.00   Expira%on:   2  months  

Strike  Price   Call  Status   Op%on  Price   Intrinsic  Value   Extrinsic  value  35   ITM   15.30   15.00   0.30  40   ITM   10.90   10.00   0.90  45   ITM   7.10   5.00   2.10  50   ATM   4.20   0.00   4.20  55   OTM   2.10   0.00   2.10  60   OTM   0.90   0.00   0.90  65   OTM   0.30   0.00   0.30  

Strike  Price   Put  Status   Op%on  Price   Intrinsic  Value   Extrinsic  value  35   OTM   0.30   0.00   0.30  40   OTM   0.90   0.00   0.90  45   OTM   2.10   0.00   2.10  50   ATM   4.20   0.00   4.20  55   ITM   7.10   5.00   2.10  60   ITM   10.90   10.00   0.90  65   ITM   15.30   15.00   0.30  

Page 7: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

WMT  Chart  (low  vola%lity)  

Page 8: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

WMT  Dec  Op%ons  (1  month)  

ATM  

Imp  Vol  

Stock  price  

Page 9: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

RIMM  Chart  (higher  vola%lity)  

Page 10: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

RIMM  Dec  Op%ons  (1  month)  

Intrinsic  value      80.00  -­‐  58.48=  21.52  Extrinsic  value:  21.65  -­‐  21.52  =    0.13  

Imp  Vol  

Stock  price  

0  .00/  0.06  

0  .00/  1.05  

0.00  /  2.73  

9.02  /  0.73  

0  /  0.10  

0.00  /  0.69  

0.98/  2.77  

18.48/  0.12  

5.98/  1.12  

21.52/0.13  

Page 11: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Call  Parity  Graph  

entry   strike  

profit  

stock  price  premium  

entry   strike  

profit  

stock  price  premium  

Increased  %me  and/or  vola%lity  

Page 12: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Call  -­‐  Far  OTM  

entry   strike  

profit  

stock  price  premium  

Page 13: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Call  -­‐  OTM  

entry   strike  

profit  

stock  price  premium  

Page 14: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Call  -­‐  ATM  

entry  strike  

profit  

stock  price  premium  

Page 15: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Call  -­‐  ITM  

entry  strike  

profit  

stock  price  

premium  

Page 16: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Call  –  Deep  ITM  

entry  strike  

profit  

stock  price  

premium  

Page 17: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Put  –  Far  OTM  

entry  strike  

profit  

stock  price  premium  

Page 18: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Put  -­‐  OTM  

entry  strike  

profit  

stock  price  premium  

Page 19: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Put  -­‐  ATM  

entry  strike  

profit  

stock  price  premium  

Page 20: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Put  -­‐  ITM  

entry   strike  

stock  price  

premium  

profit  

Page 21: Volality) · High)Volality)stock,)2)months)to)expiraon) Stock)Price:) 50.00 Expiraon:) 2)months) Strike)Price) Call)Status) OponPrice) Intrinsic)Value) Extrinsic)value) 35 ITM 15.30

Long  Put  –  Deep  ITM  

entry   strike  

stock  price  

profit  

premium  


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