13 Mar Intraday Option Prices
Understanding Options Prices
As options prices change during the day, they will be out of line for moments in time. Most of the time, they will find their balance again. In this article, we discuss Intraday Opyion Prices that don’t come back into line and present two steps to determine which option variable changed.
Why Prices May Be Out of Line
When we view option prices during the day, we expect to see calls and puts trading at roughly the same implied volatility. There are times when put-call parity will be out of whack. This happens for a number of reasons:
Short-term supply-demand imbalances
Typically normalizes after a short time; calls & puts of the same strike will return to trading at same implied volatility.
To adjust for a change in market opinion of volatility
Implied volatility moves up or down as markets forward view changes; as the higher implied volatility is accepted by the markets, put-call parity will come back into line.
To adjust for a change in market views of financing
Financing changes due to changes in:
• Interest rate used to borrow/lend money
• Dividend paid on stock, stock going ex-div before expiration
Option price changes related to a change (in fact or perception) during the trading day are either a change in stock borrow/stock loan (SBL), a change in dividend (or perception of future change) and/or a change in implied volatility (the perception of volatility on the underlying asset to expiration day).
The Two Steps to Understand New Options Prices
The two steps to understand new options prices as they change during the day will (generally) yield the answer as to which variable is changing:
1. Check the straddle.
- If the straddle has changed (implied volatility changed), then view on forward volatility has changed.
- If straddle is unchanged, it could be financing.
2. Check the synthetic forward price.
If the synthetic forward price has changed, the change could be the SBL rate or the dividend.
- Cost to carry: rates higher or stock is harder to borrow
- Dividend: could be raised (instituted) or cut
AN EXAMPLE
Table 1 shows our starting options prices.
Table 2 shows option prices during the day.
Notice the straddle has changed while the synthetic forward price is unchanged. From this, we conclude the market has changed its perception of volatility over the next 60 days. Using Vega (for approximation) of .105 for call and .105 for put, approximate change in implied volatility as: Change in straddle / .21 (sum of call and put vegas). $1.12 / .21 = 5.33%. The market expects the underlying asset to trade at a 36.33% volatility over the next 60 days.
Table 3 shows another set of option prices during the day.
Notice the straddle is unchanged at $6.50 while the synthetic forward price has changed. The synthetic forward price is now $65.12 (-.25). Therefore, one of two variables could have changed: The SBL rate or the dividend. The SBL rate went down OR the company declared (or is expected to declare) a dividend where the stock will trade ex-dividend prior to expiration.
The forward price is .25 cents lower at the start of today’s trading ($65.12 versus $65.38). Rho for the call is +.054 and for the put -052, or an approximate change in rates of .106 (note1). From this we can approximate the SBL rate changed by .25 / (.106) = 2.54%. Alternatively, we can approximate the company has (or is expected to) announce a dividend of .25, with the stock going ex-dividend before expiration.
A quick call into your stock borrow-stock loan desk will give you the answers.
A FINAL WORD OF CAUTION
This two-step process can answer more questions in very quick order. But use it judiciously. Call and put prices may just settle back to their original implied volatility with put-call parity back in line.