A recent observation :
3/2/2008
IV - means implied volatility
all options have a delta near .50
EUI ATM call
IV = 9.8 cost .60
EUI ATM
put IV = 10.6 cost .70
XDE ATM call IV
= 8.7 cost 1.30
XDE ATM put
IV = 11.2 cost 1.50
XDE = EUR/USD
EUI = USD/EUR
Whats going on here ?
The puts are more expensive than the calls.
Should the XDE put and the EUI call have the same IV ?
XDE is more expensive than EUI, is it because traders cannot read the chart in reverse
? I cannot answere these questions. But I can take advantage of this convoluted pricing.
FURTHER INVESIGATION :
(all values are approximate)
a 300 pip positive move:
EUI yields a 400% value increase
XDE yields a 250% value increase
a 200 pip negative move:
EUI becomes worthless
XDE loses 50% value
The trading advantage here is plain as day ! Would you buy something that will increase in
value by 250% or 400% ?
Would you buy something that could become worthless or lose 50% of its value ?
I would:
buy 400%
buy 50% lost value
sell 250%
sell become worthless
(in various combinations)
Hypothetical trade:
LONG STRADDLE ( buy call - buy put )
EUI straddle cost = 1.30
after 200 pip move up the value is 1.96 for a profit of .66
after 200 pip move down the value is 2.13 for a profit of .83
XDE straddle cost = 2.80
after 200 pip move up the value is 3.00 for a profit of .20
after 200 pip move down the value is 3.40 for a profit of .60
(results assume IV is unchanged )
Are you smarter than a fifth grader ? Im not sure why the option pricing is all screwed up,
but I know which trade to take.
An ignorant person is one who doesn't know what you have
just found out.
Will Rogers
