The Lehman Offering: Time to Short?
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My initial take was the same. However Lehman may be a dangerous stock to short right now. The options implied volatility is extremely high so if you’re going to bet against it you would be better off shorting the stock directly and not through options.
The implied volatility is triple its norm. Options are very expensive at this level.
Today Lehman was up $6.70 (17.8%) leading the financials higher. This offering actually seems to have quelled fears that it was headed towards a Bear Stearns fate. The XLF (financials ETF) was up 7% as were most of the big financials. Lehman truly led the financials higher today. Looking at the chart also leads me to believe this would be a dangerous bet against Lehman. I think there will be profit taking tomorrow morning, but other than that I’m not sure I’m willing to bet against it. Since I usually trade options and the options are expensive right now, I will choose another target. In fact I would even consider selling some puts against Lehman at this level.
- Why I buy In The Money (ITM) options - 07/01/08
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- POT - Time to short? - 04/11/08
- Why Options Traders Must Watch Implied Volatility - 04/03/08
- Trading the Microsoft/Yahoo! Buyout Showdown - 02/11/08
“The options implied volatility is extremely high so if you’re going to bet against it you would be better off shorting the stock directly and not through options.”
Can you explain why it is better to short than use options? If it’s extremely volatile, it seems to me that options would limit your risk and offer potentially greater gains.
Thom - Right or wrong, my opinion is that the options are extremely expensive for Lehman. If the stock does move, but the volatility drops then you could still lose money on your puts. That is why I recommend shorting the stock directly. I see some risk of the volatility coming back down.
Again - It may not be the best advice, but it has happened to me before so I a get antsy when I see volatility spike so high for a stock. You’d like to be there somewhere as the volatility goes up making your option value rise as opposed to buying at a volatility peak (which I suspect is the case).
Ahh, I see. I didn’t even think about implied volatility affecting the options price. Little by little I’m learning more about options.
If the stock had moved past the strike price, you could exercise the option and then this change in price of the option wouldn’t affect your profit right?? It’s only if you intend to resell the option itself that changes in its price matter. So it’s almost analogous to holding a bond until maturity in that any changes in price along the way would be irrelevant. (It’s a crude, incomplete analogy but it makes a little sense in my head)
Thanks for explaining your Lehman rationale.
No problem. It can be frustrating when you see your stock make that move you were expecting only to see a loss on your options. I learned this with $$$$ unfortunately always wondering what I did wrong. I did not truly understand what makes options move. Now that I do I can trade profitably consistently.