# Beta monster



## ducati916 (9 December 2006)

I have been following this one all week on an intra-day basis. I am interested in any ideas utilizing options, that you can come up with.

I have been looking at synthetics, both strikes & positions.
The market makers however seem pretty onto taking your money as they are valuing the options way above fair value;

Monday
Strike $115
Common @ $114.61
Put @ $13.00...........fair value = $13.19 [got that one]

Tuesday
Strike $120
Common @ $119.82
Put @ $14.10.........fair value = $13.67

Wednesday
Strike $125
Common $124.98
Put $15.90............fair value $14.90

Thursday
Strike $120
Common $122.67
Put $13.40 ................fair value $12.49

Friday [today]
Strike $120
Common 121.26
Put $14.40................fair value $13.08

The good thing apart from the MM wanting to rip your kidney out, is this baby moves, and has good liquidity 5M shares/day
Any ideas?


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## wayneL (9 December 2006)

Baidu!! LOL

Yes a day traders dream (nightmare?) 



			
				Ducati said:
			
		

> fair value



How are you calculating fair value?

But overvaluation can be tamed by either going way OTM or way ITM. Both of these have their trade-offs in the greeks but this will remove a substantial amount of extrinsic value... unless of course there is significant skew (which there probably is)

The other option is to spread... A simple ATM vertical spread will be vega and theta neutral at the entry price. Once again though there are tradeoffs in the greeks, and delta for delta, there is more contest risk in the spread.

What time frame are we looking at?


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## ducati916 (10 December 2006)

*enzo*

BIDU, yes this one is a monster.



> _How are you calculating fair value?_




At the moment using BSOPM, but I do it long hand, and my calculators battery & my brain are getting fried. And by the time I've completed the calculation, the price is historical anyway.



> _But overvaluation can be tamed by either going way OTM or way ITM. Both of these have their trade-offs in the greeks but this will remove a substantial amount of extrinsic value... unless of course there is significant skew (which there probably is)_




That's true [OTM/ITM]
Skew is something I don't yet look at, as I don't understand it, but, as you allude it may alter the valuation of DITM, I have only been calculating ATM [or at least when I start calculating]



> _The other option is to spread... A simple ATM vertical spread will be vega and theta neutral at the entry price. Once again though there are tradeoffs in the greeks, and delta for delta, there is more contest risk in the spread._




Spreading, implies a stance, viz. moderately bullish or bearish. I am wanting to be neutral, viz. a straddle, but this is where the overvaluations kill the strategy.



> _What time frame are we looking at?_




Shorter timeframes preferrably, 1wk to 1mth.

Now I'm sure the snooker balls make eminent good sense to you, they however look like snooker balls to me, you're going to have to break!

jog on
d998


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## wayneL (10 December 2006)

ducati916 said:
			
		

> At the moment using BSOPM, but I do it long hand, and my calculators battery & my brain are getting fried. And by the time I've completed the calculation, the price is historical anyway.




Yowza! Get some software...better still a specialist options broker with a decent platform:

www.thinkorswim.com
www.interactivebrokers.com
www.optionxpress.com an 1 or 2 others.

All others don't even know how to margin properly.

OK Fair value. This can be a contentious subject. What is fair value? This can mean different things to different people (MM, retail, broker) I take it to mean the whether the tradable price is fair relative to your volatility inputs, and here is where it gets tricky.

What volatility should we enter? Statistical volatility must take a subjective retrospective period, and apply it to todays option value. Yet the realized volatility in the ensuing time period may not reflect the statistical volatility at all. Volatility could rise or fall, substantially.

Making Volatility projections are guesses at best. So this "fair value" concept is a tough one. However all the above should be taken to make a (personal and subjective) case for over/undervaluation.

High native levels of volatility do present some challenges which come later



> That's true [OTM/ITM]
> Skew is something I don't yet look at, as I don't understand it, but, as you allude it may alter the valuation of DITM, I have only been calculating ATM [or at least when I start calculating]




Most of the time, implied volatilities will vary between the ATM and away from the money strikes. 

In the SPX options for e.g. ATM are currently trading around 10% Higher strikes are getting down to 8%, lower strike way away from the money around 14-15%. This is because any black swan scenarios will most certainly occur on the downside; this is called a volatility smirk (because of the shape when you graph it). Whereas in stocks, the black swan can fly on both the upside and downside, so IV's will rise the further away from the money you get on both sides. This is called a volatility smile.

It occurs because people will cough up for OTM strikes where they see most risk. The corresponding put/call is then arbed up to the same level.

This can be a help or a hinderance, depending on what you are trying to do.



> Spreading, implies a stance, viz. moderately bullish or bearish. I am wanting to be neutral, viz. a straddle, but this is where the overvaluations kill the strategy.




10-4



> Shorter timeframes preferrably, 1wk to 1mth.
> 
> Now I'm sure the snooker balls make eminent good sense to you, they however look like snooker balls to me, you're going to have to break!
> 
> ...




Ok now I know where we are heading.

Being long gamma (i.e. buying straddles) at high native vols such as BIDU presents some problems.

Firstly, The higher the extrinsic value of options the less gamma there is. This is a problem with straddles because we need gamma in order to manufacture deltas and therefore profit. So we need to go to the near expiries. But then we have to contend with high theta.

If the thing is going to bounce around a lot with strong whippy moves, we can scalp gamma, by continuously hedging back to delta neutral with stock. If you can make more profit in the gamma scalps than theta is costing every day. Thats obviously good. If it suddenly goes quiet on you, you lose.

Another thing to consider is to pay for some of that long gamma by being short the wings i.e. a short butterfly. This will limit the possible loss, but also limit profits in the case of a fat tail occurence.

Best practice is to enter long gamma positions when the prognosis is for an upswing in volatility. i.e. go long vega when IV is at a low.

Then there is the other side of the coin... short gamma (selling straddles/strangles)

This can be playing with fire with a stock like BIDU, unless limiting risk by longing the wings (long butterfly/condor or short irons) but generally the inverse of the above applies.

Cheers


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## ducati916 (10 December 2006)

*enzo*




> _What volatility should we enter? Statistical volatility must take a subjective retrospective period, and apply it to todays option value. Yet the realized volatility in the ensuing time period may not reflect the statistical volatility at all. Volatility could rise or fall, substantially.
> 
> Making Volatility projections are guesses at best. So this "fair value" concept is a tough one. However all the above should be taken to make a (personal and subjective) case for over/undervaluation._




Agreed.
Currently, the vega that I input is a bit of a blend [read educated guess]
For instance, I calculated the vega for BIDU on Friday @ 58%
If you have a different vega, I'd be interested in the value you find.

This arbitrary vega, will obviously impact the fair value for the time of purchase, and could vary a week later.......that's the game.



> _In the SPX options for e.g. ATM are currently trading around 10% Higher strikes are getting down to 8%, lower strike way away from the money around 14-15%. This is because any black swan scenarios will most certainly occur on the downside; this is called a volatility smirk (because of the shape when you graph it). Whereas in stocks, the black swan can fly on both the upside and downside, so IV's will rise the further away from the money you get on both sides. This is called a volatility smile._




Ta.
Quite simple and logical really.



> _Firstly, The higher the extrinsic value of options the less gamma there is. This is a problem with straddles because we need gamma in order to manufacture deltas and therefore profit._




And I think this is pretty much what evaporated from Wednesday on,
and in addition the spreads widened to $0.80 between B/A. [March Expiry]



> _So we need to go to the near expiries. But then we have to contend with high theta_




I didn't fancy a 10 day expiry window.



> _If the thing is going to bounce around a lot with strong whippy moves, we can scalp gamma, by continuously hedging back to delta neutral with stock. If you can make more profit in the gamma scalps than theta is costing every day. Thats obviously good. If it suddenly goes quiet on you, you lose.
> 
> Another thing to consider is to pay for some of that long gamma by being short the wings i.e. a short butterfly. This will limit the possible loss, but also limit profits in the case of a fat tail occurence.
> 
> ...




Have to come back to this after I read up and understand what it is you are trying to convey. I use pretty basic Options strategies.

jog on
d998


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