Market volatility has remained at historically high levels for quite some time now. Some analysts attribute this to the shift towards computer trading. No matter the reason, it's easy to the VIX is high. While options can be used to speculate, they can also be used to manage risk. They can be a great tool for finding investments, or combinations of investments, that fit your risk profile. It's important to have a fundamental understanding of what options are, and things like premium and intrinsic value. The stock market moose option screener free version is a very powerful tool for finding ways to control risk. It is the best free option screener available, no exaggeration.
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FRO : Frontline Ltd. is a shipping company, headquartered in Bermuda.
great thinking guys.
P/E < 10. positive cash-flow. high, consistent dividend.
I HAD a slightly in the money covered call on this. Now it's slightly out of the money.
Their operating income seems to be falling. The amount of sell-off seems irrational.
should have stuck with married puts!
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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.
how to gauge intrinsic, mid, and premium when there are sign changes.
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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.
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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.
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.
great covered-call opportunity.
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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).
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