Some more infos about how to calculate the IV of options:
http://www.quantonline.co.za/Articles/article_volatility.htm
And here just an idea how to make money with knowing the SV but not knowing the exact IV of the option. Not sure if it works in your market. So you may test it once:
Option 6% OTM*
When the OEX volatility was 20%, an option that was 6% OTM with 10 days until expiration likely had no realistic chance of being worth something before or at expiration, thus it was probably trading for $0.05 (the minimum option price). Once volatility went to 40%, there was now a reasonable chance of the option strike 6% OTM being worth something, so the market will begin to assign it a value. Certainly anyone who had sold them thinking they were going out worthless will want to buy them back to avoid the options increasing in price, and losing money on the options.
The option that had no value and was offered at $0.05 will have people trying to buy them back, so the option will likely become $0.05 bid. If everyone around you is trying to buy the option for $0.05, is there a realistic likelihood that you will get to buy the options for $0.05 before anyone else including the traders on the floor? Eventually, enough fear will precipitate people feeling the need to buy back their naked short puts before they cause any real harm, and may decide to pay $0.10 before they can't buy them back at all.
This purchase of an option for $0.10 now has the nervous traders who were hoping to get the options bought for $0.05, in panic mode. They will no longer have enough patience to wait things out, as they all have had a $0.05 option go to at least $ 1 at some point in their career, so $0.10 does not seem too bad now. In addition, a broker who has an order to buy those options at the market price sees they are now $0.10 bid and offered at $0.15. He is forced to buy the $0.15 ask price. You now see how vega increases the price of a 'garbage' option just as it does with a closer to-the-money option, provided the option has some realistic chance of being worth something.
*(Source: Option Greeks for profit by J.L.Lord)
If you have the time, a must read book for option traders.
DanPickUp
http://www.quantonline.co.za/Articles/article_volatility.htm
And here just an idea how to make money with knowing the SV but not knowing the exact IV of the option. Not sure if it works in your market. So you may test it once:
Option 6% OTM*
When the OEX volatility was 20%, an option that was 6% OTM with 10 days until expiration likely had no realistic chance of being worth something before or at expiration, thus it was probably trading for $0.05 (the minimum option price). Once volatility went to 40%, there was now a reasonable chance of the option strike 6% OTM being worth something, so the market will begin to assign it a value. Certainly anyone who had sold them thinking they were going out worthless will want to buy them back to avoid the options increasing in price, and losing money on the options.
The option that had no value and was offered at $0.05 will have people trying to buy them back, so the option will likely become $0.05 bid. If everyone around you is trying to buy the option for $0.05, is there a realistic likelihood that you will get to buy the options for $0.05 before anyone else including the traders on the floor? Eventually, enough fear will precipitate people feeling the need to buy back their naked short puts before they cause any real harm, and may decide to pay $0.10 before they can't buy them back at all.
This purchase of an option for $0.10 now has the nervous traders who were hoping to get the options bought for $0.05, in panic mode. They will no longer have enough patience to wait things out, as they all have had a $0.05 option go to at least $ 1 at some point in their career, so $0.10 does not seem too bad now. In addition, a broker who has an order to buy those options at the market price sees they are now $0.10 bid and offered at $0.15. He is forced to buy the $0.15 ask price. You now see how vega increases the price of a 'garbage' option just as it does with a closer to-the-money option, provided the option has some realistic chance of being worth something.
*(Source: Option Greeks for profit by J.L.Lord)
If you have the time, a must read book for option traders.
DanPickUp
