# Option volatility pricing advanced trading strategy and technique

Any option which has a positive intrinsic value is said to be in-the-money by the amount of the intrinsic value. If we assume that the options making up a time spread are approxjmately at-the-money, time spreads have two important characteristics:. The mean of the lognormal distribution will be located at the forward price of the underlying contract. The goal of option evaluation is to determine, through the use of theoretical pricing models, the theoretical value of an option.

The difference between an option and a futures contract: For returns contact us Availability: Each spread will be sensitive to changes in the price of the underlying instrument.

The constant-elastictty ofvariance,or CEV, mode1 8 is based on an assumed relationship between volatility and the price level of the underlying contract. Option trading is both a science and an art. Long time spreads are likely to be profitable when implied volatility is low but is expected to rise; short time spreads are likely to be profttable when implied volatility is high but is expected to fail.

The purchase or option volatility pricing advanced trading strategy and technique of a theoretically mispriced option requires us to establish a hedge by taking an opposing positlon in the underlying contract. Fences go by a variety of names: All options must expire at the same time. The positive or negative effect of changing market conditions is summarized in Figure The gamma sometimes referred to as the curvature of an option, is the rate at which an option's delta changes as the price of the underlying changes.

Rather than asking what the correct volati1ity is, a trader might instead aSk, given the current volatiUty climate, what' right strategy? Market participants are making the logical assumption that what has happened in the past is a good indicator of what will happen in the future. Models and the Real World The accuracy of values generated bya theoretical pricing model rests on two points: Please refer to the seller's comments before ordering. All deliveries in business days.