One of the reasons I'm hesitant to start buying CQP calls is because of the relatively high extrinsics (and thus Implied Volatility).
Based on what I've read, for highly liquid options, the supply/demand relationship is what sets the extrinsics, but for options with low liquidity the extrinsics are set by the market makers (via bid/ask). In either case the extrinsics are fed into whatever IV model one is using and IV is calculated, and that is what we see displayed on our monitors.
Looking at the CQP November options here's what Optionshouse has:
Yeesh. That's huge compared to AGNC, MTGE, BMY, EPD, ETP, and everything else. In fact, it's about 3x as much. Looking at the past data, IVs have been low-mid 30s for ATM options, so this is definitely high even for this high-IV stock. Is demand pushing up the call prices, or are the MMs? If the MMs are, and they're using historical volatility to set their implied volatility, I'm expecting the IV to drop the further away from the the 8% drop on Sept 20 and the 4.5% drop today. But, I have no idea how the MMs set IV in the absence of the supply/demand force. How many days do they use in their calculation of standard deviation, do they weight near-days more than far-days, is that all proprietary, etc?
Man, I wish I didn't have to work, then I could waste^H^H^H^H^H spend my day reading all the articles on SA to understand this stuff.
For now it's bull put spreads, but I'm itching to get some calls because of the potential for a HUGE runup.
A good way to get a quick intuitive feel for the relative historical volatility of two stocks is to chart one and add the other as a comparison symbol (using Yahoo or any other charting system). Since comparison charts show percentage changes from a specific point of time, it is easy to see which one is more volatile.
If you make such a chart for AGNC vs. CQP you will see that AGNC's movement is like that of a lamb in the fields, whereas the movement of CQP is like that of a wild cat. This is especially evident in the 6-month and 12-month charts. (Too bad we cannot post links any more).
Implied volatility is not always equal to historical volatility, of course, (it sometimes hides future expectations based on other information) but the two are usually close.
Spreads are a good way to deal with high IV, and you are doing that already. (Or you can go deeper ITM). It's also good to have a sense of where the IV of what you are trading is compared to what it usually is. If it's higher than usual, then it could shrink soon -- and vice versa. Does Options House show a historical chart of IV? If so, visit it often. (Fidelity does, but it's an IV average over all options so its applicability to a specific contract is limited -- you have to eyeball the IV distribution of the entire option chain to get a better sense of what that chart means for a specific contract).
The deal with a stock like CQP is that it is currently 2.40 below the offering price of 25.07(I believe). That is huge, IMO. As a result, the IV is high(from such a dramatic drop). So folks can wait for a hopeful better IV and hence better pricing of the options( for purchase), but only if the PPS stays the same. When a stock is flying, IV goes up, hence a good time to buy if you have a bottom. If stock is stable, IV low, you don't have opportunity for basement prices that a dramatic pull back offers. Flash crashes = high IV = great buying opportunities. Its the nature of the beast.
Those trading, and willing to pay the high price did so( I did), for the thought that the PPS might not remain here long. Look at Aug 8th and June 4th(over 2.5 and 3.00 intraday variations), and then look what happened(up, up and away). I think we might have a flash crash down in CQP, before the move up..(.the reason...shake out of weak hands from this pull back). If so, watch IV go up to 60-70. I will still be a buyer(small, ITM), with the thought in mind that we will still see a minimum, IMO, of the spo offering PPS(25.07) by EX date(so if a crash to 20.50, buy Nov20's for 2.00, and you make 3.00, by EX).
Yeah, I understand about the crashes contributing to high IV, I'm just surprised at a 40%+ IV and it gives me reason to look at selling the puts instead of buying the calls (see the post I just put up). If we get a crash from here, I'll buy some more as well, or sell some put spreads. :)
I just love that the put spreads can roughly cancel out the extrinsic penalty.