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you could buy long term options on airline companies Not right now. The implied volatility, aka the cost of options, is too high. For example, American Airlin
by PhantomGremlin 7y ago
you could buy long term options on airline companies
Not right now. The implied volatility, aka the cost of options, is too high.
For example, American Airlines, symbol AAL, closed Friday at about $16 per share. If you go to January 2021, the cost of a $20 strike call is about $3. So you need AAL to rise from $16 to $23 just to break even. That's almost a 50% gain needed, in less than a year.
The cost of options will get much cheaper once the market settles down (even if current price levels stay the same). If the market sits in the doldrums for a few months (not moving up or down very much) then option prices will fall.
You need to buy options when they're cheap, not when they're crazy expensive.
- kolinko 7y agoI’m curious - why is that so? I would assume that with higher volatility there are more people participating in the futures markets, and the margina should be lower - not higher
- the_pwner224 7y agoMargins will be lower but the prices will still be higher. In low vol periods: if stock is at $2, it is likely to stay at $2 since vol is low. So maybe a $3 option is worth 10 cents. But there are very few people in the market so there's going to be a large big-ask spread. Nobody's going to sell it at 10c; there are few other sellers so you can offer it at 15c and rip off the buyer since they have no choice. At high vol periods everyone wants to be in the market so the price will actually be close to the 10c theoretical price - less spread (what you. All margin). But since there is high vol the stock is more likely to get to $3 so the option could be worth 20 cents instead of 10. Volatility affects price; market volume affects spread.
- chillacy 7y agoIf you think options are overpriced you can sell options too. They're crazy expensive because people think they'll print.