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Stock Options in Value Investing


The option markets can present special-situation investors with an opportunity to make spectacular profit from a little known market inefficiency.-page 230

In reality, when it comes to investing in the options of companies undergoing extraordinary corporate change,special situation investors have a huge advantage over the high-powered quants (read,,computer-wielding eggheads,, or more accurately ,,rich computer-wielding eggheads,,).-page 230

This is because in many cases option traders stock prices as simply numbers-not as the prices of share in actual businesses.In general,professionals and academics calculate and options ,,correct,, or theoretical price by first the measuring the past price volatility of the underlying stock- a measure of how much the stock has fluctuated.This volatility measure is then plugged into a formula that is probably some varient of the Black-Scholes model.-page 230

The stocks of companies undergoing an immitent spinnof,corporate restructuring or stock merger may move significantly as a result of these special transactions-not because historically their stocks have fluctuated in a certain way.-page 231


Buying call options

You are leveraging your bet on the future performance of a particular stock.You are also limiting the amount you can lose on the bet to the price of the call.-page 217

Call options can be purchased up to two and half years before they expire.This often gives ample opportunity for the stock market to recognize the result from an extraordinary corporate change likerestructuring or turn around in fundamentals.- page 218

Additionally,two and half years is often enough time for many just plain cheap stocks either to be discovered or regain popularity.-page 218
Statements above are from the book: You can be a stock market genius by Joel Greenblatt


Writing put options 

Warren Buffett  acknowledged writing put options  on Coca-Cola stocks,at the time he was thinking of adding to his stake in the soft drink company.This occured in April 1993,when Cokes stock hovered around 39 dollars per share (before splits).Buffett was out to acquire several million more shares of Coca-Cola but was fearful that the stock would rally and run away from him.He wrote puts covering 5 million shares at an exercis price of 35.Buffett collected a 7.5 million premium (1.5 per option).-page 212

By using options, Buffett was attempting to get more shares of Coke on cheap and,in the process,collect a premium to defray his costs.It worked this way . If Coca-Colas stock crashed before the option expired,the buyers would put the stock to Buffett,forcing him to take 5 millionCoke shares off their hands for a net price of 33.5 per share (the 35 strike price minus the 1.5 premium).That suited him fine because he wanted the shares anyway and hoped they would fall in price when itcame time to buy.-page 213

However,had Cokes stock risen in price , the buyer would have let the option expired worthless.No stock would have changed hands,but Buffett would have pocketed the 7.5 million premium,which is exactly what happened.The stock rose past the point at which Buffett wanted to buy and he walked away with 7.5 million premium,but knowing that he didnt overpay for Coca-Cola.-page 213

Statements above are from the book: How to pick stocks like Warren Buffett by Timothy P.Vick
By GordonGekko at 2007-03-28 07:02 | General discussion | previous forum topic | next forum topic

Stock options

You can find nice summary of stock options here:

http://biz.yahoo.com/opt/ - just enter stock symbol

for the free option chart use this website:

www.quotemedia.com

By GordonGekko at Wed, 2007-03-28 07:13 | login or register to post comments

MSN options quotes

I've just started looking into options for cheap speculation. MSN has a better options site than Yahoo!: http://moneycentral.msn.com/investor/options/

By smtkr at Wed, 2007-03-28 08:13 | login or register to post comments

Stock options-Joel Greenblatts sister

Smtkr,

do you know what symbol these options of Joel Greenblatt sister have/had ?

http://www.stokblogs.com/node/402#comment-669
By GordonGekko at Thu, 2007-03-29 05:56 | login or register to post comments

More info

To which symbols are you referring? American Express and Ameriprise Financial? I was just looking at the link provided by theo. All I see at the edgar website is what theo posted about call positions (no note about strike price or expiration).

American Express and Ameriprise Financial have fallen a lot since that filing date, so if those options were worth anything on that filing date, I hope she got rid of them fast.

By smtkr at Thu, 2007-03-29 08:38 | login or register to post comments

More info II


If I understand it correctly she bought: 

American Express    call option-CUSIP-025816909
Ameriprise financial call option-CUSIP-03076C906


I wanted to look up the chart of these options on www.quotemedia.com and couldnt find symbol for this CUSIP number.

Any idea where I could find option symbol for thess CUSIPs?
By GordonGekko at Thu, 2007-03-29 09:02 | login or register to post comments

CUSIPs

I think you have to pay money to search the CUSIP database. I don't know for sure. This might all be for nothing anyway. Like I said, those options are probably expired or underwater right now.

By smtkr at Thu, 2007-03-29 09:47 | login or register to post comments

Chesapeake energy - easy income


This statement is from BARRONS newspapers article, written by Naureen S. Malik
(Wednesday,March 28,2007 INSIDE SCOOP)


With earnings tied closely to the price of oil and natural-gas commodity prices, the stock has been choppy over the past year, oscillating between $27 and $34.

Ben Silverman, director of research at InsiderScore.com, says that if the stock stays above $27.50, McClendon "picks up some easy income" through short puts he has sold on 85,600 shares at that strike price. The puts were sold at 80 cents each and expire on Oct. 20, 2007. So, subtracting the 80-cents cost for the options, McClendon is betting that the stock won't move below $26.70, but more importantly, that it will stay above $27.50, notes Silverman.

PS:you can check the chart of this option (symbol CHKVY) on www.quotemedia.com 
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By GordonGekko at Thu, 2007-03-29 17:13 | login or register to post comments

Option arbitrage


http://www.optionstar.com/aa.htm  

By GordonGekko at Sun, 2007-04-01 15:13 | login or register to post comments

Covered calls & Naked puts


I found these two websites that are extremely helpful:

www.optionsbuddy.com; www.callpix.com ; - great sites to spot high yield covered calls

and of course the best site www.quotemedia.com - !! FREE OPTION CHARTS !!!!



Start- naked puts

First play

I don't mind to average down my purchased price on JOSB so I will write naked put options: if market goes up I take premium, if market goes down I'll average my purchase price. I love these win-win situations !!!!

So here we go - put option QZSQF strike 30,premium 0.45 expire at close friday, 18/5/2007. I hope these quants out there know that all fundamental data go first 14 days in April.Laughing


Second play

Beazer homes (BZH)- I don't own the stock,but I think that the stock is undervalued .My geiger counter told me that .LaughingIMHO fair price is 38 dollars. So I will either get the stock with 35% discount (strike+ premium) or just the premium. Premium is 0.45,strike 25 so it is 1.8% for 20 days or 32.85% for 365 days .This I should be able to do with hold and buy so the reward is not so bad.

So BZHPE strike 25,premium 0.45.Expire 20/4,Friday. So quants have 20 days to beat me otherwise I take the premium,but I don't mind the stock as well because :

1.stock is undervalued
2.I could write a nice covered call later


I love this game
    
 
By GordonGekko at Mon, 2007-04-02 02:55 | login or register to post comments

Pelcmarek,writing naked puts

Pelcmarek,

writing naked puts really is an awesome way to make money. I am wondering what broker you use to apply this strategy. Some only let you write covered options etc...I would very much appreciate if you shared with us your experience with writing options at a brokerage account.

Thanks a lot,

jan
By JanHendrik at Mon, 2007-04-02 07:13 | login or register to post comments

JanHendrik


http://www.optionhouse.com/home/rates/index.jsp 

If you live in Europe they will not open you an account

www.optionsexpress.com

these guys will open you an account and allow you to write naked puts even if you live in Europe.

(To write 10 naked puts I mean puts for 1000 shares costs 15 dollars.)

By GordonGekko at Mon, 2007-04-02 10:54 | login or register to post comments

hey pelcmarek,thanks a lot

hey pelcmarek,

thanks a lot for the links...

There is a little typo in there: it's www.optionsxpress.com

...good service though!

Jan
By JanHendrik at Tue, 2007-04-03 13:51 | login or register to post comments

JanHendrik


They have nice demo as well.


Happy investing and don't forget that over 85% options expire worthless
By GordonGekko at Tue, 2007-04-03 16:57 | login or register to post comments

OPTION CHARTS


QZSQF-JOSB 2007,MAY 30 PUT

Chart Image 




BZHPE-BZH 2007,APRIL  25 PUT

Chart Image


As You know I have written both of these naked puts for 0.45 premium :)

By GordonGekko at Wed, 2007-04-04 18:28 | login or register to post comments

Alice in Wonderland


,,One quick example: the Washington Post  Company in 1973 was selling for 80 million in the market. At the time, that day,  you could have sold the assets to any one of ten buyer for not less then 400 million probably appreciably more. The company owned the Post ,Newsweek, plus several television station in major markets Those same properties are worth two bilion now, so the person who would have paid 400 million would not have been crazy.


Now, if the stock had declined even further to a price that made the valuation 40 million instead of 80 million, its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier .This is truly Alice in Wonderland , i have never been able to figure out why its riskier to buy 400 million worth of properties worth for 40 million than 80 million ,, Warren Buffett


Materials written for optionsXpress Europe BV by Robert Sullivan. All rights reserved, 2007, optionsXpress Europe BV

Models are limited by the numerical inputs used to calculate the theoretical value of an option. In 1973, two University of Chicago mathematics professors, Fischer Black and Myron Scholes devised a model that even today remains a standard for many option traders. The Black-Scholes Model , as it is known, was such an important advancement that the professors earned a Nobel Prize for their work.

The volatility of the underlying stock may be the most important factor in pricing options because unlike the other numerical inputs which have an exact value, volatility can only be known with certainty from a historical standpoint. At any given moment, the strike price, the current market price, and a few relatively minor factors we haven't examined yet (i.e., prevailing interest rates, stock dividends) are all exact numbers that people know and agree upon. With volatility, that isn't the case.


What is volatility?
In simplest terms, volatility is the tendency of a stock to fluctuate and the likelihood that it will be within a particular price range at a specific moment in time. The higher the volatility, the more prone a stock is to large price swings. Conversely, low volatility stocks tend to show a history of stable prices.


Low Volatility
Some stocks, like utilities, tend to be relatively stable over time because their earnings are relatively predictable. People who invest in these stocks often do so for the slow, steady growth and consistent dividends. At the same time, they want secure investments they don't have to monitor everyday. With these low volatility stocks, the daily price changes are generally fractional. While the long-term trend may be up, the short term trend may even appear to be sideways. A good example of this is Ameren (NYSE: AEE), a large Midwestern utility. Looking at Ameren from the point-of-view of an options trader, we see a 52-week range between $46.50 and $37.43. Given this level of stability, even an untrained chart reader could predict the price range over the subsequent months with a high degree of accuracy. Considering the low likelihood that the stock would deviate from this pattern of low volatility, the market for options on this stock was quite small in terms of volume and price. This is confirmed by the options chain:


High Volatility
Other stocks, like Internet and biotechs tend to have larger daily price swings. The bigger the price swings, the more volatile the stock. When assessing stock volatility, traders look at a particular period of time (e.g., 90 days). However, it may be necessry to look at volatility over a shorter period, particularly when recent developments change the long-term outlook for a company.


From an options trading standpoint, it makes sense that people would be willing to pay more for options on a stock that has a higher likelihood of making a profitable move during the life of the option. As we can see, that's exactly what happens.


Let's take EBAY, Inc. (Nasdaq: EBAY) as an example. Here's a stock that had some fairly significant price swings in a relatively short period of time. The 52-week range on this stock was from $30.88 to $61.60. Given this level of volatility, it stands to reason that options on this stock would be significantly more expensive than they would for a stable utility like Ameren.

As you might imagine, there are several advantages to trading options on volatile stocks. As we've already discussed, there is a greater likelihood that the options will finish in-the-money. Although the options tend to be more expensive, they also tend to be more liquid. This is an important consideration because whether you are getting in or out of the market, you want to get the best price. The more frequently the contracts trade, the more likely that market competition will maintain a tight bid-ask spread.


If for some reason, the actual volatility of the options decreases, the options will lose value faster than their less volatile counterparts. However, that's a known risk most traders are willing to take. In fact, many traders make their fortunes selling options when volatility is high and covering their positions when the market becomes less volatile.

Implied Volatility
Before we examine the ways professional traders use volatility in conjunction with theoretical pricing models, it's important to note that these calculations are all done by computer programs. What typically happens is that traders plug their volatility assumptions into the computer and have instant access to theoretical option values at a wide range of stock prices.


Although not all traders rely on models, those that do use a volatility assumption, usually based on a historical value, as a barometer for where they believe options should be trading. At the same time, traders monitor the actual market prices to determine what is known as implied volatility. By plugging real-time option prices into a theoretical model (instead of a volatility assumption), the same equation can be used to calculate the volatility of each option. For example, while the 90 day volatility of a stock may be 25%, the current option prices may imply higher or lower volatilities even for the same expiration month.


Some professional traders have sophisticated programs that continually monitor the implied volatilities of every exchange traded option looking for options that are significantly underpriced or overpriced relative to their historical volatility. These options are then either bought or sold and hedged against other options or stock. In the example above, if a program determined that the volatility of the September 55 call (42%) was statistically significant relative to other options, the trader might decide to sell the 55 calls and buy the 40 or 45 calls as a hedge.


Theoretical value of an option -The fair value of an option as predicted by a mathematical formula such as Black-Scholes. This takes into account the following factors: strike price, the current price of the underlying, interest rates, time remaining until expiration, dividends (if any), and volatility.

Implied Volatility-The amount of movement expected in the stock given the current price of the options

Historical Volatility- a measurement of the actual movement of stock price over a specific period of time. This number can be plugged into an option pricing formula like Black-Scholes to determine if current option prices are high or low relative to the stock's past performance.


You can find theoretical value, implied volatility and historical volatility here :

www.optionsexpress.com – toolbox – pricer
By GordonGekko at Fri, 2007-04-06 14:37 | login or register to post comments

Alice in wonderland II


So right now we know that: according to models the faster and lower fell the price, the higher is the volatility, the higher is the premium.If the actual volatility of the options decreases, the options will lose value faster than their less volatile counterparts and generally, as expiration approaches, the levels of an option's time value, for both puts and calls, decreases or "erodes."  

and now some strategies:

http://www.investment-tools.com/options_reports_1.htm

http://www.investment-tools.com/Reports/options/options_reports_2.htm

Investment Tools Inc. 2007-
 
Statements bellow are from the website: http://www.investment-tools.com/options_reports_1.htm

1)
Don't buy an over-priced option - Don't sell an under-priced option 

This is stating the obvious.  However, many new options traders are not aware of option pricing models.  There are many options pricing models that calculate theoretical price of an option based on current price of stock, strike price, time for expiration,  volatility  and risk free return.   Most commonly used is  Black-Scholes options pricing model.  By comparing actual price of an option with theoretical price calculated using options pricing model, one can determine if the option is  over-priced  or under-priced.

2)
Abnormally high volatility or abnormally low volatility will tend to regress to mean, and there in lies an opportunity.Probability of profit increases if option is bought when implied volatility is low compared to its historical volatility, and if option is sold when implied volatility is high compared to its historical volatility.

Some people prefer looking at over priced and under priced  options by comparing ratio of implied volatility to historical volatility.  If IV/HV ratio is high an option is over priced.  If IV/HV ratio is low an option is under priced.

3)
Options open interest indicates public sentiment.  Very high call options open interest indicates that the public is bullish,  very high put options open interest indicates that the public is bearish.  Majority usually turns out to be wrong so this is a contrary indicator.

4)
Many times cheap options with probability of profit above 30 % can prove profitable.  Since these cheap options do not require large amount of money, options on several stocks can be purchased.  A small percentage of profitable options can cover the cost of all the options plus provide profit.

5)
Option seller should sell options with high implied volatility or a high  implied volatility/historical volatility ratio.

6)
Option Buyer wins in 1 out of 4 scenarios.  Option Seller wins in 3 out of 4 scenarios.


Many rela examples you can find here:
http://www.investment-tools.com/Reports/options/options_reports_2.htm 
By GordonGekko at Fri, 2007-04-06 19:40 | login or register to post comments

JanHendrik


How is your option investing ?

These naked puts I virtually wrote on 2007-04-02 (see my comment above)

Put option QZSQF strike 30,premium 0.45 expire at close friday, 18/5/2007
Put option BZHPE strike 25,premium 0.45 expire 20/4,Friday



I was thinking you could like this:


Stock (NDE)  - IndyMac Bancorp Inc. (NDE)
stock price $28.97, fair value:$32,  Consider buying:$21

NDEQX- strike price $22.5 - $ premium 0.9 expire at close Friday,18/5/2007
Theoretical value: 0.08, Bid 0.9 ,Implied volatility 113%,Historical volatility 67.2 %,IV-HV 46.67

So what do you think ?
By GordonGekko at Sun, 2007-04-15 15:51 | login or register to post comments

Pelcmarek,wow, NDE options

Pelcmarek,

wow, NDE options are indeed very expensive. I do not want to own the company for the long term but NDEQX.X look like a save bet.

Thanks for pointing them out to me!

Jan
By JanHendrik at Mon, 2007-04-16 07:22 | login or register to post comments

Delta

DELTA
The delta of an option tells us is effectively how many underlying contracts we are long/short.

GAMMA
The gamma is telling us how fast our "effective" underlying position will change.Gamma shows how volatile an option is relative to movements in the underlying asset.

The Gamma value is the same for calls as for puts. If you are long a call or a put, the gamma will be a positive number. If you are short a call or a put, the gamma will be a negative number

OPTION PRICING
How will the value of the option change as the stock price changes? (Delta)
What is the probability of the option expiring in-the-money/out-of-the-money? (Delta)
How fast will the option lose value as it approaches expiration? (Theta)
What effect will a change in the stock's volatility have on the option value? (Vega)

http://www.optiontradingtips.com/pricing/index.html 

By GordonGekko at Fri, 2007-07-27 03:26 | login or register to post comments

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