MBIA has a Janurary 20 call that offers 14.8% Time Value and 15% Downside Protection. This seems to good to be true so it probably is. What must one look at when you find large Time Value in the current months calls. I am writing covered calls as an investment strategy.
2007-12-23 06:52:47 · 4 answers · asked by Les R 1 in Business & Finance ➔ Investing
When you find large time values in any month's options that tells you that implied volatility is high.
High implied volatility tells you that a lot of people are expecting a large move in the price of the underlying stock before expiration.
That expection tells you, or at least should tell you, that there is a lot a risk associated with trading options on that stock.
In the case of covered calls, you have a large risk of a big loss if the price of the stock takes a nose-dive before the options expire.
Risk and reward are always related, so if you can get a bigger than average reward you are taking a bigger than average risk.
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Every option trader I have heard express an opinion on the subject has said that chasing high premiums to sell, simply because the potential reward is higher, is a losing strategy.
<<< What must one look at when you find large Time Value in the current months calls.>>>
(1) What events are expected that could have a big impact on the price of the stock before the options expire?
(2) If a majority of option traders are expecting a big move in the price of the stock, but I do not, what in the world makes me think I am smarter than most other traders, many of whom are professionals?
(3) Can I afford the loss I am likely to experience if I am wrong?
2007-12-23 15:04:37 · answer #1 · answered by zman492 7 · 0⤊ 0⤋
MBIA is a bond insurer and is likely to go bankrupt very quickly because of the subprime debacle and the CDOs they've insured.
I don't doubt your numbers because implied vol in all the bond insurers is huge but that 15% downside protection will seem pretty punny when the stock goes to zero.
2007-12-23 16:16:26 · answer #2 · answered by Oh Boy! 5 · 0⤊ 0⤋
What about volatility? That's another variable in price of options. That is what you have here. MBIA had 5 times normal volume Thursday, more than twice normal volume Friday. Be ready to act fast if you are long, IV, implied volatility, will soon run out of this stock.
2007-12-23 15:28:50 · answer #3 · answered by pumpdatiron 6 · 0⤊ 0⤋
December options expired yesterday. Check your numbers again tomorrow, when the price reflects the loss of the Dec contracts.
2007-12-23 15:52:13 · answer #4 · answered by edco 5 · 0⤊ 0⤋