How To Make A 350% Annualized Rate Of Return Trading Options
by admin on 19/07/09 at 9:12 am
This article teaches you how to make a 350% annualized rate of return trading options, using the power4XL Black-Scholes Options Toolkit. I cannot take the credit for this method as someone else created it, but maybe that fact lends more weight to my praise as my opinion is unbiased. Here, we will relate the creator’s experiences.
The macros for black-scholes options analysis can be used to evaluate the trade before you make it. Doing so sometimes yields perspectives and trading strategies you would not have identified simply by trading on gut instinct.
Trade Summary
In this particular trade, the author got a tip from a broker to short the stock of Zymogenetics, Inc. (ticker: ZGEN). Instead of shorting the stock, he decided to look at buying put options (the right to sell the stock at a future point in time at a predetermined price). Consequently he pulled up the options grid on Yahoo! finance, and thought the options looked pricey. That’s where the Excel analysis came in. Using the avol() and ivol() functions, he found that while the historical volatility was in the 40% range, the implied volatility of soon-expiring options was in the 80% – 90% range – a potential “implied volatility arbitrage”. Thus it appeared that the options were overpriced, so he would be better off selling than buying. He ended up selling out-of-the-money call options, and placing a conditional “buy” order for the stock if it reached his break-even price on the trade. Ten days later when the options expired, the stock was trading at 10% below the price it had been on the day he bought the options. The money he would have needed in order to fund the conditional “buy” order sat in a money fund earning 4% (annualized), but the profits from selling the calls amounted to a 350% annualized return on the amount he had set aside in reserves.
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