Are naked calls/puts insanely +EV? What am I missing here?
 

Etrade lets you see the the Theoretical Value of calls/puts for stocks. This theoretical value is based off the Black-Scholes formula. I assume they base it off the derivation of the formula that is used for American options. The thing is I plugged in a few stocks and it seems like the theoretical value of every call/put option is less than what the option is trading for. For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

[ QUOTE ]
Etrade lets you see the the Theoretical Value of calls/puts for stocks. This theoretical value is based off the Black-Scholes formula. I assume they base it off the derivation of the formula that is used for American options. The thing is I plugged in a few stocks and it seems like the theoretical value of every call/put option is less than what the option is trading for. For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?

[/ QUOTE ]

Experience? Logic?

I dunno, what aren't you missing?

J

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

[ QUOTE ]
[ QUOTE ]
Etrade lets you see the the Theoretical Value of calls/puts for stocks. This theoretical value is based off the Black-Scholes formula. I assume they base it off the derivation of the formula that is used for American options. The thing is I plugged in a few stocks and it seems like the theoretical value of every call/put option is less than what the option is trading for. For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?

[/ QUOTE ]

Experience? Logic?

I dunno, what aren't you missing?

J

[/ QUOTE ]

Care to elaborate?

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options.

[/ QUOTE ]

The formula is only theoretical but I want to know why it's always pricing the options lower than they are trading for.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

What you're missing is the theoretical value is based on the average volatility over the past 30 or 60 or something days. Does this market in the last few days seem like it's trading with the same volatiity as the last couple months?

They used to show the current volatility so you could see if the option was mis-priced, but they took that feature off the last time I looked.

There are options professionals that have software that continually looks for options mis-pricing opportunities.

You are missing unlimited risk
 

When you go long a call or a put your risk is limited to what you paid for the option.

When you are naked short either your risk is unlimited.

Unlimited market risk with your level of experience and understanding might not be a good idea.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

Read "Fooled by Randomness", by Nassim Taleb or "the Black Swan". Look up Long Term Capital Management as well.

Basically the Black-Scholes formula doesn't describe the reality of risk taking.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

the payoff profile of selling options is basically win win win win win win win win win win win LOSE HUUGGGEEE

you are earning a premium for selling coverage to those who want it.

aside from the fat that the B-S model is woefully deficient in pricing of these options, the payoff profile itself isn't very attractive.

Barron

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

My father just bought me a copy "Fooled by Randomness" because he read it randomly and thought I would like it. I didn't realize that other people had actually read the book and actually recommended it for financial reading.