ikkyu

Opportunities in Options Markets, Summer 2009

Greetings Geoff,

Nice to see the evolution of your thoughts about monte-carlo and options pricing. I think this is the most interesting stuff you have done to date.

Please let me ask a few questions, if you don't mind.

Not sure why underpriced options would suggest buying calls rather than buying puts (or more reasonably straddles) in the short run (<3 years). Serial correlation can be positive with a negative price trend, can it not?

Also, are you talking about buying OTM calls on EBAY? While stock markets tend to go produce positive results over long periods, you have to have to inherently predict the magnitude of the move when buying options.

Which options are you talking about selling? The long dated LEAPs or the front month? You would have interest rate risk on the LEAP, far lower gamma initially, and wider bid-ask spreads. I usually divide the time value by the number of days till expiry to get a better idea of the decay per day.

Also, why sell covered calls at all? Naked puts would be the risk equivalent and would simplify things. If you get exercised, you could then start selling calls on the underlying.

While i like your plan, it is clearly not an equivalent for Bodie's conservative methods. Bodie's plan seems like it would work better with a call spreads. It would be like your own index annuity.

Just some thought. Nice piece of work. Seems like you are definitely thinking out of the box.

Cheers from Osaka,
john