This is the stuff I think about. Do you own any asset at all, where the price fluctuates with a predictable volatility? Consider the following.
I will sell, the right, but not the obligation, to buy my 568 sq foot condo, in one of the most central places in Toronto, for $275K, in 3 years from today, in exchange for $21K in cash today. Considering futures (pre-sales for 2011) are selling for approximately $300K today, it may or may not, be a good deal.
I will also buy, the right, but not the obligation to force the sale upon somebody, for $240K, in exchange for me paying them $2K. This may be worth it to you – is it?
This $21K, and $2K, is derived from my intrinsic expectations for what the market could potentially do, as well as a binomial method. In the first case, the money is worth more to me to have the cash, rather than the potential. And in the later, the $2K worth of insurance, is worth it.
Measuring the implied volatility, this is works out to 7.5%. Way cheaper, than any stock which usually clips between 25% and 45%, and it’s not rare to see IV approach the double digits on say – a pharmaceutical company, where perhaps the implied volatility is in fact worth it.
Before you comment, you must understand, that this is an offer, it is the bidders responsibility to assess the value for themselves. That is, REALIZE: the market is not guaranteed to move in ANY direction, or ANY magnitude. If you think it is – slap yourself.
