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Zecco.com » General Investing » Options Trading » OTM Puts
Last post 08-06-2007, 8:34 AM by Uncle Billy. 1 replies.
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  •  08-03-2007, 10:12 AM 9630

    OTM Puts

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    Wouldn't there be an inherent edge to shorting OTM puts and keeping delta neutral with underlying? If ATM implied is best guess for forward stat vol, then this seems a case of "overvalued" options. For the SPX, 20d puts implieds are ~ 500bp > than ATM. Comments?

  •  08-06-2007, 8:34 AM 9709 in reply to 9630

    Re: OTM Puts

    Reply Quote

    Implied option volatilities are often not constant throughout the range.  This is due to a variety of reasons, and in many cases more than one reason is at work in a particular situation.

    Your trade idea would allow you to make money only if implieds move down at the strike you have chosen, or your cost to adjust the position over time is more than offset by your positve time value decay.  As a result, it does not let you capture the "edge" which you perceive, if in fact this "edge" exists.
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