Does the MBI high time value of 12% mean investors think it will go up?

Question

MBI has a Jan call that has high time value (12%), high downside protection (13%) and high implied volitility (1.3). This means investors feel there will be a large swing in the stock in the near term but what do you look at to determine if they feel this turn will be up or down? It seems to me if call buyers are willing to bid this much premium in a stock call they feel like it will go through the roof.

Answer 1

In this case, I think the swing has nowhere to go but up... MBI sort of beaten.

Answer 2

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I don't think you can really look at anything specific to tell you. As a rule people seem more eager to buy options when they think are afraid, so a high IV does tend to indicate a fear of the price fallling.

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That is not a good conclusion because to a professional options trader a put and a call are interchangeable. To understand why, you need to understand synthetic positions. For a call, a put, or a stock position you can create an equivalent synthetic position using the other two. The basic relationships are:

Synthetic Long Call
A long put and a long stock or future.

Synthetic Long Put
A long call and a short stock or future.

Synthetic Long Stock
A short put and a long call.

Synthetic Short Call
A short put and a short stock or future.

Synthetic Short Put
A short call and a long stock or future.

Synthetic Short Stock
A short call and a long put.

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Because these relationships exist, the IV for puts and calls are almost identical. A market maker willing to pay a large premium for a call must also be willing to pay a large premium for a put.