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low volatility


Guest ericopoly
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Guest ericopoly

FFH calls, 2011 leaps with a $250 strike have an ask of $52.70.  Given a stock price of $253, this indicates that it costs $50 for the embedded put, meaning that volatility premium is exactly 20% of the strike price.

 

 

Now check this out.  KO (Coca Cola) 2011 puts with a $42.50 strike price have a bid of $8.50, and the stock closed at $42.37.  This indicates that the volatility premium is exactly 20% of the share price.

 

So lets say you have $250,000 to invest.  You can earn $50,000 by writing the 2011 KO puts, and then use the proceeds to buy 2011 FFH $250 calls.

 

 

So, who said higher returns come with higher risk?  Living proof that the market is completely nuts.  The people in school will tell you that higher potential gains come with higher risk...  well, how come you can take on KO risk in exchange for FFH upside?

 

Nuts!

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