Options, intrinsic and premium
So I charted it. Intrinsic vs. Premium, normalized by Price. The distribution pretty closely matches my sketch from an earlier post. But it does illustrator a slight difference. Premiums are highest at-the-money, But they are also slightly higher in the money.
interesting options – 2001-7-31
| ticker | stock price | type | mid | strike | premium | expiration date | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FRO | 11.5 | call | 2.45 | 40 | 2.45 | 2013-01-19 | |||||||
| LPHI | 4.9 | call | 0.825 | 5 | 0.825 | 2012-01-21 | |||||||
| FRO | 11.5 | put | 14.4 | 26 | -0.1 | 2011-07-31 | |||||||
| FRO | 11.5 | put | 15.4 | 27 | -0.1 | 2011-07-31 | |||||||
| MNI | 2.25 | put | 1.725 | 4 | -0.025 | 2011-07-31 | |||||||
| FRO | 11.5 | put | 13.35 | 25 | -0.15 | 2011-07-31 | |||||||
| FRO | 11.5 | put | 25.75 | 37.5 | -0.25 | 104 | |||||||
| FRO | 11.5 | put | 11.25 | 23 | -0.25 | 2011-08-20 | |||||||
| UVE | 4.27 | put | 0.625 | 5 | -0.105 | 2011-10-22 |
Moose Pick GSH
GSH's price to book is slightly lower than it's historical average. 0.7 price to book makes GSH look like a outstanding deal.
GSH's P/E is only slimly lower than it's historical average. 12.0 P/E makes GSH look like a great buy. And price to book is exceedingly attractive. Looks like a outstanding buy overall.
GSH's price is not too far from it's 20 day moving average. No technical analysis suggestion for gsh.
Guangshen Railway Co. Ltd.'s Moose Rating: NaN%
This pick was made July 29, 2011.
Please keep in mind it is very important to review fundamental variables such as market cap, long term earnings history, and long term dividend history from many financial resources.
trying to visualize
how to gauge intrinsic, mid, and premium when there are sign changes.
| ticker | stock price | type | mid | strike | premium | premium to price | intrinsic value | intrinsic to price | intrinsic to premium | expiration date | open interest | captured |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NOK | 5.8 | put | 0.025 | 2.5 | 0.025 | 0.00431034 | -3.3 | -0.568965 | -132 | 2012-01-21 | 500 | 2011-07-29 |
| ANH | 6.92 | put | 0.05 | 5 | 0.05 | 0.00722543 | -1.92 | -0.277457 | -38.4 | 2012-01-21 | 10 | 2011-07-29 |
| NOK | 5.8 | put | 0.18 | 2.5 | 0.18 | 0.0310345 | -3.3 | -0.568965 | -18.333333333333 | 2013-01-19 | 920 | 2011-07-29 |
| NOK | 5.8 | put | 0.16 | 4 | 0.16 | 0.0275862 | -1.8 | -0.310345 | -11.25 | 2012-01-21 | 1171 | 2011-07-29 |
| ANH | 6.92 | put | 0.125 | 6 | 0.125 | 0.0180636 | -0.92 | -0.132948 | -7.36 | 2012-01-21 | 104 | 2011-07-29 |
| NOK | 5.8 | put | 0.39 | 5 | 0.39 | 0.0672414 | -0.8 | -0.137931 | -2.0512820512821 | 2012-01-21 | 7941 | 2011-07-29 |
shark bait?
Wasn't finding many slightly in the money married-put plays out there, so I decided to deviate a little. This one is slightly out of the money. I bought it (went long) 1 to 1 contracts / shares. Since my purchase I was wondering if a mixed ratio could worked better. The premium is really low, which makes sense, but it's kind of hard to conceptualize how this stacks up since the intrinsic value is negative. This screener does have an intrinsic:premium column, but only for premiums greater than zero.
I think if you are dumping some massive amount of money into an investment then it would probably be worth the leg work to churn out some ratios like that for out of the money options. In this case I was only investing a moderate amount of money.
Thinking out loud: If the stock price goes down.. The premium of the put will grow at a much faster percentage rate, ... That doesn't really mean anything. Here are the facts: I have about $0.95 per share exposure due to the put being out of the money. If the stock is below where it's at now when the put expires, then I am potentially out all of that negative intrinsic value. The premium will however go up, in theory it will be highest when its closest too the money. It's pretty close now.
Ideas of how to handle it: It seems like the best thing about this option is that the premium could grow a lot. It will probably be highest once it's slightly in-the-money. But, what should I do if it gets there, and I sell it? look for a higher strike put (theoretically lower premium)? find a high premium call to sell?
It's starting to sound like speculation to me. I will wait it out and collect some 14% dividends.
| ticker | stock price | type | mid | strike | premium | expiration date | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ANH | 6.92 | put | 0.125 | 6 | 0.125 | 2012-01-21 |
time decay
A chart that illustrates time-decay of option premium. Lots of "learn about options" guides briefly touch on time decay. It pretty key to realize the premium is whats decaying.
probably the most important thing to understand about options
this illustration is probably the single most important thing to understand about options. A few disclaimers: I drew it in photoshop. If you actually plot historical option data a better fit could probably be found with some sort of polynomial function, or normal distribution, but this is just to illustrate a point: Premium is almost always higher near the money.
There are of course outliers. If you plot a bunch of intrinsic and premium data there will certainly be exceptional cases. These cases are what I am most interested in. They could be thought of as "bargains" or "market inefficiencies".
I feel that premium and intrinsic are probably the most fundamental variables related to options. Technical and Fundamental analysis both use math and comparison of ratios to spot outliers. However technical analysis makes an assumption that price is bound to some sort of probability distribution. It's not.
covered-call pick
great covered-call opportunity.
| ticker | stock price | type | mid | strike | expiration date | open interest | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NOK | 5.92 | call | 1.735 | 5 | 2013-01-19 | 12153 |
Good company, good fundamentals. You can probably get about an $80 premium per contract on this one, coupled with $0.95 of intrinsic value.
Dangers of this position include: If Nokia stops paying dividends. If the share price drops below around $4 then the losses will stop being offset by the shorted call. If Nokia shares go way up you will certainly miss some of that gain.
Good things about this position: It's a high premium. The premium + the intrinsic value offer downside protection. Nokia could slide up to 20% and you would still be in a good situation. Nokia pays a high dividend. If the share price goes way up, the premium will most likely go way down (highest premiums are usually near the money). The open interest is high, which is a good sign of liquidity (easy to find a buyer and seller).
Moose Pick – Nokia
The price to book is higher than most Value Investing rule's of thumb would suggest. But the price is way down, and the dividend is really high. Pre-smart phone Nokia's were great - super reliable, great battery life. It turns out Windows is a really lousy smart phone OS. I've never actually tried it, so maybe its just a marketing problem. But it is a problem. Surely someone at Nokia has figured this out. I recently purchased some Nokia shares, and a put that had a really low premium. Today I spotted a slightly in the money call that has a really high premium. Lots of risk reduction plays to be made on NOK.
Moose Pick SSW
SSW's price to book is slimly lower than it's historical average. All the same 0.8 is decent, but there are more likely better bargains.
The P/E ratio for SSW is considerably lower than it's historical average. 5.8 P/E makes SSW look like a swell bargain. And price to book is very attractive. Looks like a outstanding buy overall.
SSW's cash from operating is positive, which is great. It also is growing, which is extremely keen. Ssw's net cash change is negative, which is bad. Also it is not growing, which is very bad.
SSW's price is not too far from it's 20 day moving average. No technical analysis suggestion for ssw.
Seaspan Corp.'s Moose Rating: 74%
This pick was made July 21, 2011.
Please keep in mind it is very important to review fundamental variables such as market cap, long term earnings history, and long term dividend history from many financial resources.
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