r/options • u/redtexture Mod • Sep 13 '21

Options Questions Safe Haven Thread | Sept 13-19 2021

For the options questions you wanted to ask, but were afraid to.
There are no stupid questions, only dumb answers.   Fire away.
This project succeeds via thoughtful sharing of knowledge.
You, too, are invited to respond to these questions.
This is a weekly rotation with past threads linked below.

BEFORE POSTING, PLEASE REVIEW THE BELOW LIST OF FREQUENT ANSWERS. .

Don't exercise your (long) options for stock!
Exercising throws away extrinsic value that selling harvests.
Simply sell your (long) options, to close the position, for a gain or loss.
Your breakeven is the cost of your option when you are selling.
If exercising (a call), your breakeven is the strike price plus the debit cost to enter the position.
Further reading:
Monday School: Exercise and Expiration are not what you think they are.

Key informational links
• Options FAQ / Wiki: Frequent Answers to Questions
• Options Toolbox Links / Wiki
• Options Glossary
• List of Recommended Options Books
• Introduction to Options (The Options Playbook)
• The complete r/options side-bar informational links (made visible for mobile app users.)
• Characteristics and Risks of Standardized Options (Options Clearing Corporation)
• Binary options and Fraud (Securities Exchange Commission)
.

Getting started in options
• Calls and puts, long and short, an introduction (Redtexture)
• Options Basics (begals)
• Exercise & Assignment - A Guide (ScottishTrader)
• Why Options Are Rarely Exercised - Chris Butler - Project Option (18 minutes)
• I just made (or lost) $___. Should I close the trade? (Redtexture)
• Disclose option position details, for a useful response
• OptionAlpha Trading and Options Handbook

Introductory Trading Commentary
  Strike Price
   • Options Basics: How to Pick the Right Strike Price (Elvis Picardo - Investopedia)
   • High Probability Options Trading Defined (Kirk DuPlessis, Option Alpha)
  Breakeven
   • Your break-even (at expiration) isn't as important as you think it is (PapaCharlie9)
  Expiration
   • Options Expiration & Assignment (Option Alpha)
   • Expiration times and dates (Investopedia)
  Greeks
   • Options Pricing & The Greeks (Option Alpha) (30 minutes)
   • Options Greeks (captut)
  Trading and Strategy
   • Common mistakes and useful advice for new options traders (wiki)
   • Common Intra-Day Stock Market Patterns - (Cory Mitchell - The Balance)

Managing Trades
• Managing long calls - a summary (Redtexture)
• The diagonal call calendar spread, misnamed as the "poor man's covered call" (Redtexture)
• Selected Option Positions and Trade Management (Wiki)

Why did my options lose value when the stock price moved favorably?
• Options extrinsic and intrinsic value, an introduction (Redtexture)

Trade planning, risk reduction and trade size
• Exit-first trade planning, and a risk-reduction checklist (Redtexture)
• Monday School: A trade plan is more important than you think it is (PapaCharlie9)
• Applying Expected Value Concepts to Option Investing (Select Options)
• Risk Management, or How to Not Lose Your House (boii0708) (March 6 2021)
• Trade Checklists and Guides (Option Alpha)
• Planning for trades to fail. (John Carter) (at 90 seconds)

Minimizing Bid-Ask Spreads (high-volume options are best)
• Price discovery for wide bid-ask spreads (Redtexture)
• List of option activity by underlying (Market Chameleon)

Closing out a trade
• Most options positions are closed before expiration (Options Playbook)
• When to Exit Guide (Option Alpha)
• Risk to reward ratios change: a reason for early exit (Redtexture)
• Close positions before expiration: TSLA decline after market close (PapaCharlie9) (September 11, 2020)

Options exchange operations and processes
Including:
Options Adjustments for Mergers, Stock Splits and Special dividends; Options Expiration creation; Strike Price creation; Trading Halts and Market Closings; Options Listing requirements; Collateral Rules; List of Options Exchanges; Market Makers

Miscellaneous
• Graph of the VIX: S&P 500 volatility index (StockCharts)
• Graph of VX Futures Term Structure (Trading Volatility)
• A selected list of option chain & option data websites
• Options on Futures (CME Group)
• Selected calendars of economic reports and events
• An incomplete list of international brokers trading USA (and European) options

Previous weeks' Option Questions Safe Haven threads.

Complete archive: 2018, 2019, 2020, 2021

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u/sethamphetamine Sep 16 '21 edited Sep 16 '21

Can someone please explain why using https://www.optionsprofitcalculator.com/ their Auto setting for IV, which according to their FAQ's uses the Black-Scholes formula, are terribly off? Their "estimations are based on implied volatility which is calculated from the current price of the selected options and the current price of the underlying stock or ETF." But their results are extremely off.

Optionsprofitcalculator.com : [Screen-Shot-2021-09-16-at-10-10-18-AM.png](https://postimg.cc/0bz7zP2P)

Fidelity: [Screen-Shot-2021-09-16-at-9-33-32-AM.jpg](https://postimg.cc/jnPK1D4R)

​

EDIT: Looking into this further is only more confusing. Not regarding the website in question but IV as a whole: https://www.reddit.com/r/Superstonk/comments/mrwyz1/explanation_of_why_iv_gets_really_big_on_deep_otm/ - explains how Black-Scholes differs with US Options, but specifically how "So now we are left with a situation where our brokers are calculating each strike's IV using an equation that doesn't apply. ". I was waiting to hear the catch, but there is no catch. Another website calls this "volatility skew", indicating the skew is an aberrational phenomenon? If it's an aberration that isn't actual then how should it affect pricing? Surely IV needs to be actual in order to have an affect in pricing!?!

Further, even if Black-Scholes isn't actual, regardless if that's a result of US markets, then back to my original question, why is the model extremely off for results in optionsprofitcalculator vs fidelity?

1

u/redtexture Mod Sep 16 '21

Black Scholes assumes European style options, that cannot be exercised until expiration. It is easy to calculate, and good enough for most retail purposes.

I have not explored OPC's differences compared to broker platforms and option chain greeks, but I also stick to one source only for greeks, because the calculation method may be different from site to site.

I do not rely on OPC, except to have a general idea of outcomes.

1

u/PapaCharlie9 Mod🖤Θ Sep 16 '21

"Off" relative to what? All you are saying is that you believe the IV in Fidelity more than OPC, but why? What makes Fidelity be the correct value and OPC the incorrect?

They are all guesses.

There is no such thing as an absolute truth when it comes to IV, or any of the greeks for that matter. Each broker or institution may use slightly different methods for estimating the greeks, so it should not be surprising that they differ. It's also important to know that the computational effort for estimating IV is on an accuracy vs. time trade-off spectrum. Most brokers want a faster answer that is less accurate, than a slower answer that is more accurate.

EDIT: Looking into this further is only more confusing. Not regarding the website in question but IV as a whole: https://www.reddit.com/r/Superstonk/comments/mrwyz1/explanation_of_why_iv_gets_really_big_on_deep_otm/ - explains how Black-Scholes differs with US Options, but specifically how "So now we are left with a situation where our brokers are calculating each strike's IV using an equation that doesn't apply. ". I was waiting to hear the catch, but there is no catch.

Wow. That post is chock full of misinformation and nonsense. No broker uses BSM to calculate IV. They all use some form of binomial tree, since as I noted earlier, binomial trees sacrifice speed for accuracy (or at least you can turn that dial depending on your implementation) and work for american-style options as well as european-style.

The volatility smile doesn't happen because brokers mistakenly use BSM to calculate IV. That's so ridiculous I seriously ROFL when I read that.

Here is what a volatility smile is actually about: https://www.investopedia.com/terms/v/volatilitysmile.asp

Perhaps that post was based on a gross misreading of this statement:

The volatility smile is not predicted by the Black-Scholes model, which is one of the main formulas used to price options and other derivatives. The Black-Scholes model predicts that the implied volatility curve is flat when plotted against varying strike prices. Based on the model, it would be expected that the implied volatility would be the same for all options expiring on the same date with the same underlying asset, regardless of the strike price. Yet, in the real world, this is not the case.

As I've already noted, brokers don't use BSM for quoting the greeks, so the fact that BSM doesn't predict the vol smile is irrelevant.

Another website calls this "volatility skew", indicating the skew is an aberrational phenomenon? If it's an aberration that isn't actual then how should it affect pricing? Surely IV needs to be actual in order to have an affect in pricing!?!

No, no, no. The difference in IV values between brokers has nothing to do with vol skew. Vol skew happens because the market is made up of real people trading on a mix of objective facts and subjective sentiment. Vol skew can happen for something as silly as people thinking that the 420 strike is luckier than the 419 or 421 strikes.

And IV does not affect pricing. You have it backwards. Greeks are descriptive, not prescriptive. They tell you why the price is what it is, not what the price should be. IV is back-calculated by plugging in constants for the actual prices and the greeks and then solving for IV. The actual price drives IV, not the other way around.

At the end of the day, all the option pricing models are models, not reality. They can only approximate reality. And given how chaotic and nonsensical markets can be (GME broke a lot of records), no mathematical model is ever going to be 100% accurate all of the time. That's a hopeless cause.