Stocks & Commodities V. 28:1 (73): Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile

I’ve often heard traders and analysts make statements along the lines of such and such move is being priced into a stock in front of a key event with regards to its options. What is this and how is it calculated?

Great question, but it’s not a “one size fits all” situation. What’s being expressed is how option traders’ collective actions can be fitted into a price estimate for the movement expected in the shares once the event driving the option premiums is announced.

For instance, in front of Food and Drug Administration (Fda announcements, a typical scenario) is to see option premiums get bid well-above theoretical fair value based on the stock’s underlying movements. Traders doing the bidding are willing to pay the stiff prices in the calls and puts because the expectation is that the news will move shares dramatically enough to compensate for the added premium risk.