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One last question Ira, and I do thank you for your
time. You compared the theoretical value to the actual value. When I buy the
straddle I usually pay the ask price so why don't you compare the theoretical
value to the ask price? Do you hope to get filled at the "price" in the price
column?
Regards
John Manasco
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Ira Tunik
To: <A title=realtraders@xxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxx";>realtraders@xxxxxxxxxxx
Sent: Friday, November 17, 2000 9:12
AM
Subject: Re: AW: [RT] Market ESZ0
It all depends on the size you are dealing with. You can
consider $30 a dinner for one and buy the straddle as a one lot. If you
are dealing in size then it starts to add up. a 10 lot is $300 and a 100
lot is $3000. At what level do you consider it real money? In
options you need every edge that you can get. When I was a market maker
I knew traders that would trade large size for that type of an edge.
They would do size for an 1/8 edge, $12.50. The thing is a trader will
sell you the straddle for that edge and then trade out of both sides or put on
other spreads using the legs of the straddle to pocket that edge.
John Manasco wrote:
So in your example the theoretical value of
the straddle is 10.096 and the actual value is 10.126, a difference of .30.
Is this a significant enough difference to assume the straddle is
overvalued? The value seems small and I often wonder if it's just noise or
if my data is not as accurate enough to make a decision. <FONT
face=Arial>Thanks for your insight. <FONT
face=Arial>John Manasco
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Ira Tunik
To: <A title=realtraders@xxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxx";>realtraders@xxxxxxxxxxx
Sent: Friday, November 17, 2000 8:32
AM
Subject: Re: AW: [RT] Market
ESZ0
John Manasco wrote:
Ira, <FONT
size=-1>From the spreadsheet you provided how did you determine the
straddle was overvalued? Look at the
theoretical value of each option and compare it against the price
column. Add the price of the straddle together and compare it
against the theoretical value of the straddle. If the theoretical
value is less then the price then the straddle is overvalued. The
price column should reflect a price midway between the bid and the ask
price. The assumption being that the bid is undervalued and the
ask is overvalued based upon the Implied Volatility being used.
Also, what is the relationship between the price column and
the last column? There is none. The
last column, POS, is the position column and would reflect the number of
options long or short. <FONT
size=-1>Regards John
Manasco
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Ira Tunik
To: <A
title=realtraders@xxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxx";>realtraders@xxxxxxxxxxx
Sent: Thursday, November 16, 2000
12:54 PM
Subject: Re: AW: [RT] Market
ESZ0 Maybe these three pictures will help you clear it
up. One, the straddle is overvalued. Two, the straddle
subjects you to twice the time decay. Three, the straddle
subjects you twice the volatility risk associated with option
valuation. The spread sheet will show the current valuations, the
second chart will show you profit picture as it is today, not at
expiration for the ratio back spread and the third will show you chart
for the straddle. It trading you want as few uncontrolable variables
as possible. Ira
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