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American Capital Agency Corp. Message Board

  • heibee1234 heibee1234 Mar 13, 2013 8:12 AM Flag

    option question

    I see that April, June, and September call options for let's say 32 are listed at nearly the same price. Isn't it an advantage to purchase the September since you would have more time?

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    • First off never look at the last sale price of an option but look at the average of the bid ask price to determine what it will cost. Second, AGNC option implied volatilities are at historical lows which means that the option premium is small. You are looking at an “in the money” option which has more than the time premium as part of its value. If you want to get a better idea of the differences in time premium then look at an “at the money” or “out of the money” option. In that case you will see a significantly larger difference. When historical volatility is low the stock price is not moving a lot lately and the main assumption that goes into determining the option time premium is that future changes in the stock price are likely to be highly correlated with past changes. And if this assumption is correct then there is no advantage to getting a cheap option because the price isn't likely to change by much anyway.

      I rarely buy options because I'm tired of the option seller making most of the money and I don't like the open ended risk that the option seller is exposed to. The seller seems to make more money in the long run but their short term losses can be horrendous. In most cases the options seller is the MM. He is the one making most of the money on options. After all, if this were not the case then all the MM would go bankrupt and they don’t. They are some of the richest people in the world. The options premium formula accounts for the probability that the underlying stock price will change by a certain amount but I don’t think it accounts for the fact that it could change in either direction thus the person who sells both calls and puts will make money in the long run. And that is what the MMs do. They sell them both. I may be wrong about that because I keep meaning to do the calculation to determine if this is true or not but never get around to it.

 
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