Factors That Affect Stock Options Spread Pricing

The determination of stock options spread pricing as described above works in most cases but please be aware that this assumes that the implied volatility in both the 35 and 40 calls is the same. Most of the time, these two options will have a slightly different implied volatility.

This intra-month difference in implied volatility values through different strikes is known as a vertical volatility skew. The reason the markets run volatility skews is to make sure that the out-of-the-money stock options spread have enough premium in them to justify the individual option’s risk/reward scenario.

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This entry was posted on Friday, September 21st, 2007 at 10:51 am and is filed under Business, Finance, Investing, Money, Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.