Expensive put options

Scotty · Post by **Scotty** » Tue Sep 14, 2004 3:32 am

This paper suggests that ATM/OTM put options are over-priced by 40-95%.

Put Options

1. Any thoughts on this issue?

2. Is it possible to replicate and capture this mis-pricing?

filthy · Post by **filthy** » Tue Sep 14, 2004 2:59 pm

not to sound like mikebell but while i haven't read the paper i have an opinion already.

i think puts (otm) are overpriced in practically all cases with equity indices. i have never found a distribution or process that fits the underlying well and gives a skew anywhere near as large as is seen in the options. i think the skew is largely there for microstructure reasons.

but with regard to your second question, why do you need to replicate anything? why not just sell the puts?

AndyM · Post by **AndyM** » Tue Sep 14, 2004 3:37 pm

So this wizard concludes that selling puts between August '87 (S+P: 320 Wink and Dec '00 (S+P: 1320) [with a pretty orderly upward path] would have generated extraordinary profits 'incompatible with the canonical asset-pricing models'. I'm speechless.

tripitaka · Post by **tripitaka** » Tue Sep 14, 2004 4:53 pm

the question is, how did his model make out selling ATM Nasdaq puts in 2000?

FDAXHunter · Post by **FDAXHunter** » Tue Sep 14, 2004 5:26 pm

LOL... I just looked at this... ROFL Applause We should have a humor section in the library and put that thing there Smiley

Scotty · Post by **Scotty** » Tue Sep 14, 2004 10:05 pm

1. You could sell puts but then I'm looking for riskless arb.

2. FDAX - why?

Strange · Post by **Strange** » Wed Sep 15, 2004 1:33 am

I agree with FDAX - pretty funny stuff. I happend to know a guy that is making money by selling gutted double diagonals on a similar premise: "You can not predict the future, but one thing is certain - theta".

Scotty · Post by **Scotty** » Wed Sep 15, 2004 2:51 am

Mkay...So the index increased in value at around 8.5% over the fourteen years.

I don't think that necessarily invalidates the possibility that a strategy of selling puts is profitable.

opmtrader · Post by **opmtrader** » Wed Sep 15, 2004 6:44 am

What is a gutted double diagonal?

or is it like shopping at Tiffany's ... if you have to ask you can't afford it!

FDAXHunter · Post by **FDAXHunter** » Wed Sep 15, 2004 9:03 am

opmtrader,

A [i]double diagonal[/i] is another term for [i]strangle swap[/i]. Say, you buy the front month strangle and sell a back month strangle. A [i]gutted[/i] strategy is where you trade the call(s) on the lower strikes and the put(s) on the higher strike, thereby locking in the difference between the two strikes (X2-X1). This part of the strategy is essentially a zero bond, as no matter where S ends up, you will always receive at least (X2-X1).

Scotty,

As Andym already said, the index went from 329.80 to 1320.28 over that period, pretty much in a straight line (with accelerating steepness). You need to write a 42 page paper explaining that you come to the conclusion that puts were overvalued, from a historical perspective?