Extrinsic Value Comparison

In-the-money Out of-the-money

At-the-money

Effects of “the Greeks”• Influence extrinsic value• Therefore, the influence of all the Greeks is greatest on the at-the-money options

Standard Deviation

1. Measuring “normalcy” of volatility 1st Standard Deviation – 68% of observation

1. Establishes high and low end of most normal readings

2. Often seen as good opportunities to sell and to buy

1st SD

Volatility Surface

A very useful tool for examining the entire spectrum of volatility across all strikes and expirations.

Reasons for Smile

1. The shape and magnitude of the skew vary with time to expiration, market conditions, and type of underlying.

Traders prefer to sell at-the-money options to take advantage of maximum time decay.

There is less liquidity for far out-of-the-money options. Market makers have more of a difficult time “getting out” or converting their risk.

Market makers demand a higher premium to sell small “lottery ticket” options.

Volatility Cones

Volatility Cones: Graphical representations of where implied volatility has been with respect to option maturity.

JKL Volatility Cone

405060708090

100110120

20 40 60 80 100 120 140 160 180 200

Trading Days

Vol

atil

ity

2nd Standard Deviation Measurements

Directional Spreads: Bull Vertical

Bid Offer9/16/201

0 NNI 22.95 23.00

Calls SEPTEMBER Puts

BidFair

Value Offer Strike BidFair

Value Offer7.60 8.00 8.40 15.00 0.00 0.00 0.105.30 5.60 5.90 17.50 0.00 0.01 0.153.00 3.25 3.60 20.00 0.15 0.25 0.401.15 1.35 1.60 22.50 0.75 0.90 1.100.25 0.40 0.60 25.00 2.20 2.45 2.70

Implied Volatility = 43