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Good 'ole' Alcoa hit a new annual high today and is up 97.18% in the last year. Boring Aluminum company?
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Hi Ophir,
ReplyDeleteThanks for sharing your knowledge with us all,
After reading options pricing and volatility (thanks for recommending it btw) I found the straddle strategy amazing you can play both side all you need is the stock to move, what puzzled me is what can I learn from the straddle value: let say I have a stock XYZ that trade at 10$ and let say a 30 days from today straddle at 10$ have a value of 2$ (call (10$) = 1$, and put (10$) = 1$ same expiration date for both), what does it tell me this 2$?
Will the market think that 8$ and 12$ are good place to be support and resistance or maybe it is 9$ and 11$? Do I need compare it with the implied volatility of the options and have any relation that comes immediately? Is it even correct to sum them up and think this value have any significant? What other things that the 2$ value may means?
Once again thank you for your time
Eldad Nahmany.
The at-the-money (ATM) straddle value reflects the option markets pricing of a one standard deviation move in stock price. Although we generally use the log-normal probability distribution, in the short-term, the normal distribution is a reasonable estimate. So, the ATM straddle range (in your example [$8, $12]) is an estimate that reads there is ~70% (68.26%) chance that the stock stays in that range per the option market.
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