A: There are several ways to do this. I'll use a single option as an example as its easier to visualize for newer folks. Same steps for spreads pricing. (please also see the valuable comment posted by Ben Evans, at the bottom of this post)
If I bot the jan07 550c for 7.7 and I wanted to know roughly what that option is worth (not counting effect of IV) if GOOG moved up by 20 pts quickly (say within a day or two) there are several ways to do this:
1. Use an options calculator found at many websites and tools. Here is the one I use http://www.ivolatility.com/calc/ or
2. use a risk graphing tool such as the one built in on thinkorswim or hoadley.net or 888options.com. The graphing method is nothing but a giant, sophisticated options calculator, plotting all the results.
or
(click on pic to see larger version)3. look at the strike thats 20pts lower on the jan 07 chain, specifically in this case the jan07 530c (12.9ish as of this writing).
That is what the 550c will be worth if goog moved up 20pts quickly.
The same is true if u wanted to know if goog moved down 20pts, just look at the strike 20pts higher, in this case the 570c and that will give u a rough guesstimate.
1 comment:
Many of the places that you mentioned are very good areas to calculate probability of returns. I would like to mention a few things on this hypothetical play.
A March $620 sold $600 bought debit spread becomes a question of how far GOOG moves. Both contracts will move at very small delta's. They could move lock step or out of sync. With contracts that are so far out, it is very hard to determine how they will move with the stock. The majority of the value gained in these contracts will be due to increased demand for the contracts or implied volatility.
Typically what a person would be looking to achieve in trading a bull spread such as the one mentioned would be for GOOG to finish in between the contracts or higher at March expiration.
This might be an interesting position right before earnings in that increased IV might produce arbitrage opportunities between the contracts....This is not guarenteed if The 620 strike gains more value than the 600 strike.
I would in any case be a trader around earnings. Unless GOOG makes some very large moves, this combination will lose with Theta (time value) decay. Keep up the good work in informing people how to play options.
GL
Ben
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