S&P Prediction

[highnote]

Also, since the crash of '87, traders have been factoring in more volatility in the B&S model for deep-in-the-money and deep-out-of-the-money options. They learned their lesson the hard way and are now pricing in a greater likelihood of downside movement than B&S originally had.

But this has also created a skew and these predictions of larger downside moves are not always correct.

So it pays to do fundamental analysis or use a fundamental factor model to help estimate the range of movements a stock can make during a given time period.

In my case, I'm betting the movement is more likely to be to the upside, but if I'm wrong, I've got plenty of cushion to the downside. And if I'm totally wrong, the loss will be less than I've lost betting on a single horse race.

[lamboguy]

Originally Posted by highnote

The IV of the ZYNE options range from 1.00 to 8.00.

For comparison, Alphabet's ranges from 0.14 to is about 0.50. While SCYX is 34.50!

ZYNE is a piker compared to SCYX.

I am not an expert in the theory of implied volatility, but I do know that implied volatilities are derived from actual transactions and therefore they might not behave as predicted by the particular statistical model that was used to make them.

Black and Scholes only considers the option's price at expiration and therefore does not accurately price American options. I remember studying B&S many years ago in an investment class in college. Even then I knew it's use was limited for my purposes.

The Binomial Model might be better for my purposes because I look at what the option will sell at given the probability of the stock moving to a certain price. I don't calculate option IV using a Binomial Model. I more or less do it intuitively, kind of the same way I estimate the odds of a horse when I only have DRF. That said, I would like to formalize my usage of a binomial model.

I know that ZYNE can be a volatile stock, but that volatility, as you most likely are aware, is what gives it premium. I assume the risk premium exists in ZYNE because it is a high IV option. However, short-dated options are less sensitive to IV than long-dated options. This is the reason I chose to trade options on ZYNE that expire in 5 weeks rather than in 5 months.

Also, in these high IV options there is a good likelihood of reversion to the mean occurring. By selling the high IV options I can capture some of that reversion.

i knew Fisher Black very well, he used to come over my house with his 2 daughters
to hangout at my swimming pool. at that time he was a professor at Sloanes School of Business before he caved in and went to NYC to work for Goldman Sachs. boy i can't believe how fast time really fly's, i remember those days so well and they took place in the early 80's!

i used to ask him since he came up with the formula to price options, he must be able to beat the game, he replied its impossible!

i also knew Myron Schoales, he also came from my area and went out to Stanford. i stayed at his house and he told me he had a scam to beat the markets. 5 years later he bankrupted his company and cleaned out the people that invested in it called Long Term Capital. he almost took down this whole country and had to be bailed out by the taxpayers here.

i had to throw that in because these guys had immortality, and i was a complete bum that only knew how to hustle to earn a living.

i learned an important message from these 2 very brilliant men. no one person is bigger than the market itself, and the market is always the final arbitrator for anything.

[highnote]

Originally Posted by lamboguy

i knew Fisher Black very well, he used to come over my house with his 2 daughters
to hangout at my swimming pool. at that time he was a professor at Sloanes School of Business before he caved in and went to NYC to work for Goldman Sachs. boy i can't believe how fast time really fly's, i remember those days so well and they took place in the early 80's!

i used to ask him since he came up with the formula to price options, he must be able to beat the game, he replied its impossible!

i also knew Myron Schoales, he also came from my area and went out to Stanford. i stayed at his house and he told me he had a scam to beat the markets. 5 years later he bankrupted his company and cleaned out the people that invested in it called Long Term Capital. he almost took down this whole country and had to be bailed out by the taxpayers here.

i had to throw that in because these guys had immortality, and i was a complete bum that only knew how to hustle to earn a living.

i learned an important message from these 2 very brilliant men. no one person is bigger than the market itself, and the market is always the final arbitrator for anything.

That's a great story! How did you come to know Black?

I was just reading Ed Thorp's biography. He has some interesting stories about Black. Thorp developed an option pricing model a few years before Black and Scholes. Because they were all academics, they communicated back and forth about the options pricing formulations. Thorp was using his formulations to make hundreds of millions of dollars. Due to economic's public relations, the Black and Scholes model bears their name and they won the Noble Prize.

Nassim Taleb has called the B&S formula the Bachelier-Thorp formula.

[lamboguy]

Originally Posted by highnote

That's a great story! How did you come to know Black?

I was just reading Ed Thorp's biography. He has some interesting stories about Black. Thorp developed an option pricing model a few years before Black and Scholes. Because they were all academics, they communicated back and forth about the options pricing formulations. Thorp was using his formulations to make hundreds of millions of dollars. Due to economic's public relations, the Black and Scholes model bears their name and they won the Noble Prize.

Nassim Taleb has called the B&S formula the Bachelier-Thorp formula.

at the time i was unhappily married living in Lexington, Fisher's x wife and 2 kids lived about 2 blocks away. he became friendly with my x-wife, and became even more friendly with her and started coming over the house quite often, lots of times without the kids. Fisher was a nerd and a very interesting nerd. he was everything that i wasn't and 100 times smarter than myself.
that theory wound up getting the Nobel Prize in economics later on after Fisher passed away, his family never received the prize, but he was the brains behind it.

[barn32]

Originally Posted by highnote

I initiated an option spread trade on an interesting company -- Zynerba Pharmaceuticals.

I bought Aug17 calls with a $10 strike for $11.28 and sold Aug17 calls with a $15 strike for $8.62.

My max profit is about $230 per contract...and the max loss is about $230.

With $5 wide strikes (not counting commissions) the max profit is $234 and the max loss is $266.


Edward Thorp's 20% Annual Return for 30 Years

[AltonKelsey]

Tell Thomas Peterffy (google it) ,

that it was impossible to beat the game back in the good old days.

Those that can do, those that can't , teach. Literally.

[AltonKelsey]

"The IV of the ZYNE options range from 1.00 to 8.00. "


Huh?

[highnote]

Originally Posted by lamboguy

that theory wound up getting the Nobel Prize in economics later on after Fisher passed away, his family never received the prize,

Nobel prize is only given to living people.

[highnote]

Originally Posted by barn32

With $5 wide strikes (not counting commissions) the max profit is $234 and the max loss is $266.

That sounds correct. Commissions are about $6.50 each way.

Originally Posted by barn32

Edward Thorp's 20% Annual Return for 30 Years

I just finished reading his biography. Very interesting book. I also dug out an old copy of his "Beat The Market" and re-read it. That is what got me thinking about trading options again using spreads and hedges. When "Beat The Market" was published options weren't even traded on exchanges. That was in the mid 1960s. Things have sure changed.

[highnote]

Originally Posted by AltonKelsey

"The IV of the ZYNE options range from 1.00 to 8.00. "


Huh?

If Agilent has an IV of about 0.33 and ZYNE has an IV ranging from 1 to 8 then ZYNE is 3 to 24 times as volatile as Agilent.

(I think I mistakenly referred to Alphabet when I actually meant Agilent in an earlier post. I was looking in my files of implied volatility at stock symbol "A", which is Agilent, not Alphabet.)

[AltonKelsey]

Not sure where you're getting your terminology from, but IV is expressed as a percent like 35% 300%, etc.


No one compares one stock to another in terms of IV unless they are trading pairs.


The IV on any other stock is irrelevant.


PS The iv on ZYNE is near 300% , right up there in the top 5 of all stocks. Looks like they are pricing a double or carnage. Doesn't meant they have to be right.

[highnote]

Originally Posted by AltonKelsey

Not sure where you're getting your terminology from, but IV is expressed as a percent like 35% 300%, etc.


No one compares one stock to another in terms of IV unless they are trading pairs.


The IV on any other stock is irrelevant.


PS The iv on ZYNE is near 300% , right up there in the top 5 of all stocks. Looks like they are pricing a double or carnage. Doesn't meant they have to be right.

Sorry. I should have been clearer. I thought you understood that 0.33 is the same as 33%, 1.00 is the same as 100%, and 8 is the same as 800%.

On the one hand you say that ZYNE is near 300%, right up there in the top 5 of all stocks, but on the other hand, you say no one compares one stock to another in terms of IV...

Not sure what you're saying...

[highnote]

Originally Posted by AltonKelsey

Looks like they are pricing a double or carnage.

Most of the stocks my system finds have a lot of premium. Those tend to be technology or biotech stocks.

Every once in a while a stock like Herballife is spotted by my system. Makes for interesting trading.

Here is a list of recent finds:

Symbol        StockPrice    Code          		Expiration    SellStrike
Symbol        StockPrice    Code          		Expiration    Buy_Strike
AAOI          84.2          AAOI170915C00070000         09/15/2017    70        
AAOI          84.2          AAOI170915C00065000         09/15/2017    65        
AAOI          84.2          AAOI171215C00065000         12/15/2017    65        
AAOI          84.2          AAOI171215C00060000         12/15/2017    60        
AAOI          84.2          AAOI171215C00070000         12/15/2017    70        
AAOI          84.2          AAOI171215C00060000         12/15/2017    60        
AAOI          84.2          AAOI180119C00060000         01/19/2018    60        
AAOI          84.2          AAOI180119C00055000         01/19/2018    55        
AAOI          84.2          AAOI180119C00065000         01/19/2018    65        
AAOI          84.2          AAOI180119C00055000         01/19/2018    55        
AAOI          84.2          AAOI180119C00070000         01/19/2018    70        
AAOI          84.2          AAOI180119C00055000         01/19/2018    55        
ALXN          126.71        ALXN180119C00110000         01/19/2018    110       
ALXN          126.71        ALXN180119C00105000         01/19/2018    105       
AXON          24.28         AXON171215C00017500         12/15/2017    17.5      
AXON          24.28         AXON171215C00015000         12/15/2017    15        
AXON          24.28         AXON171215C00020000         12/15/2017    20        
AXON          24.28         AXON171215C00015000         12/15/2017    15        
AZO           506.31        AZO180119C00420000          01/19/2018    420       
AZO           506.31        AZO180119C00410000          01/19/2018    410       
LITE          63.8          LITE171215C00055000         12/15/2017    55        
LITE          63.8          LITE171215C00050000         12/15/2017    50        
MOMO          41.37         MOMO180119C00035000         01/19/2018    35        
MOMO          41.37         MOMO180119C00030000         01/19/2018    30        
MZOR          41.79         MZOR171117C00035000         11/17/2017    35        
MZOR          41.79         MZOR171117C00030000         11/17/2017    30        
NFLX          161.12        NFLX171215C00140000         12/15/2017    140       
NFLX          161.12        NFLX171215C00135000         12/15/2017    135       
NFLX          161.12        NFLX180119C00140000         01/19/2018    140       
NFLX          161.12        NFLX180119C00135000         01/19/2018    135       
NUGT          29.1          NUGT171215C00020000         12/15/2017    20        
NUGT          29.1          NUGT171215C00015000         12/15/2017    15        
NVDA          164.95        NVDA171117C00135000         11/17/2017    135       
NVDA          164.95        NVDA171117C00130000         11/17/2017    130       
NVDA          164.95        NVDA171117C00140000         11/17/2017    140       
NVDA          164.95        NVDA171117C00130000         11/17/2017    130       
NVDA          164.95        NVDA180119C00130000         01/19/2018    130       
NVDA          164.95        NVDA180119C00125000         01/19/2018    125       
NVDA          164.95        NVDA180119C00135000         01/19/2018    135       
NVDA          164.95        NVDA180119C00125000         01/19/2018    125       
NVDA          164.95        NVDA180119C00140000         01/19/2018    140       
NVDA          164.95        NVDA180119C00125000         01/19/2018    125       
PI            52.62         PI180119C00045000           01/19/2018    45        
PI            52.62         PI180119C00040000           01/19/2018    40        
PTLA          62.42         PTLA180119C00050000         01/19/2018    50        
PTLA          62.42         PTLA180119C00045000         01/19/2018    45        
SHOP          92.41         SHOP171020C00080000         10/20/2017    80        
SHOP          92.41         SHOP171020C00075000         10/20/2017    75        
SHOP          92.41         SHOP180119C00080000         01/19/2018    80        
SHOP          92.41         SHOP180119C00075000         01/19/2018    75        
SVXY          170.22        SVXY180119C00130000         01/19/2018    130       
SVXY          170.22        SVXY180119C00125000         01/19/2018    125       
TDOC          35.45         TDOC180119C00030000         01/19/2018    30        
TDOC          35.45         TDOC180119C00025000         01/19/2018    25        
TSLA          327.78        TSLA171117C00285000         11/17/2017    285       
TSLA          327.78        TSLA171117C00280000         11/17/2017    280       
TSLA          327.78        TSLA180119C00250000         01/19/2018    250       
TSLA          327.78        TSLA180119C00240000         01/19/2018    240       
TSLA          327.78        TSLA180119C00280000         01/19/2018    280       
TSLA          327.78        TSLA180119C00270000         01/19/2018    270       
VEEV          64.25         VEEV180119C00055000         01/19/2018    55        
VEEV          64.25         VEEV180119C00050000         01/19/2018    50        
WB            74.31         WB180119C00060000           01/19/2018    60        
WB            74.31         WB180119C00055000           01/19/2018    55        
YY            63.79         YY180119C00050000           01/19/2018    50        
YY            63.79         YY180119C00045000           01/19/2018    45        
YY            63.79         YY180119C00055000           01/19/2018    55        
YY            63.79         YY180119C00045000           01/19/2018    45

[AltonKelsey]

It's really quite simple. The IV of the options of ZYNE or AAPL or any other stock , really have nothing to do with one another.

You can make a list of High to Low IV and get an idea of which stocks are expected to be more or less volatile, but at the end of the day, there's no connection to each other.


So ZYNE at 300 vol is what it is , no matter where it sorts on the list.


Another point , the July IV is meaningless and low, as the test results are not expected to happen before that expire.


300 is the number for august and beyond.


The Aug straddle is priced at $12, stocks 19.50

This can easily tank below 10 if the results fail.

[highnote]

Originally Posted by AltonKelsey

Another point , the July IV is meaningless and low, as the test results are not expected to happen before that expire.

300 is the number for august and beyond.

I'm using an IV of about 140%.

300 is why I didn't do the Sept spread. This trade would appear to get significantly riskier the farther out you go.

Originally Posted by AltonKelsey

The Aug straddle is priced at $12, stocks 19.50

This can easily tank below 10 if the results fail.

I agree it can easily tank. But it's just as risky to buy the Aug straddle because the stock might not make a big move until September. The loss on the straddle would be greater than the spread if the stock doesn't move by Aug expiration. In fact, there would be no loss on the spread if the stock doesn't move by Aug.

It might be the case that the Aug straddle will prove to be a better bet, but based on my analysis I prefer the Aug spread.