The Phenomena
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In Options Math For Traders we discuss 5 important phenomena in the option world, all of which can help or hurt your trade. They are:
The Volatility Risk Premium
Over time, options cost more than they're worth. This is a benefit to the option seller and a headwind for the option buyer.
Implied Volatility and Skew
Strike prices below at-the-money tend to displace higher implied volatilities than strike prices that are above at-the-money. This is a benefit (headwind) to the put seller (buyer) and a headwind (benefit) to the call seller (buyer).
Time Value and Decay
Option prices don't erode in a straight line. Erosion accelerates as expiration nears. This helps sellers of short-dated options.
The Bid/Ask Spread
The bid/ask spread is very narrow in frequently traded options that are at-the-money or out-of-the-money. The bid/ask spread is wider, often much so, for rarely traded options and deep in-the-money options.
Volatility Slope
Implied volatility tends to climb as a stock drops. This is helpful to the put buyer but a headwind for the call vertical spread seller.
In Options Math For Traders we discuss 5 important phenomena in the option world, all of which can help or hurt your trade. They are:
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The Volatility Risk Premium
|
Over time, options cost more than they're worth. This is a benefit to the option seller and a headwind for the option buyer. |
Implied Volatility and Skew
|
Strike prices below at-the-money tend to displace higher implied volatilities than strike prices that are above at-the-money. This is a benefit (headwind) to the put seller (buyer) and a headwind (benefit) to the call seller (buyer). |
Time Value and Decay
|
Option prices don't erode in a straight line. Erosion accelerates as expiration nears. This helps sellers of short-dated options. |
The Bid/Ask Spread
|
The bid/ask spread is very narrow in frequently traded options that are at-the-money or out-of-the-money. The bid/ask spread is wider, often much so, for rarely traded options and deep in-the-money options. |
Volatility Slope
|
Implied volatility tends to climb as a stock drops. This is helpful to the put buyer but a headwind for the call vertical spread seller. |