Michael Stevens Option Strategy Essay
1. Assessment of the Six-Month Outlook for the Market Only four years prior to Michael’s considerations, there was a significant market crash lowering the average value of …show more content…
BNS Sep 17 Calls 17.875 20 9% 184 Hess Nov 20 Calls 8.5 9 9% 93 Nova Aug 9 Calls 16.875 17 9% 184 Power Nov 17 Calls Table 1: Implied volatility of stocks in Michael’s portfolio
From Table 1, both the BNS Sep 17 Calls and Hess Nov 20 Calls appears to be undervalued as their implied volatility is lower than the stocks’ historical volatility. This means that the option price, if calculated using the historical volatility value instead, will be higher than the current market price of the options.
Similarly, Nova Aug 9 Calls would be overvalued since its implied volatility is around 5% higher than the stock’s historical volatility. For the Power Nov 17 Calls, it appears to be fairly priced since there is only a 0.17% difference between the implied and historical volatility. With the calculated implied volatility of the four stocks in Michael’s portfolio, the corresponding prices of the put options can also be computed using the Black-Scholes model, which is shown in column 8 of Table 1.
4. Strategy of Buying Power