2012issue C038-9
Far-spot option-elasticity and percent-theta limits
A published correction to option-moneyness charts states that several far-spot option-elasticity and percent-theta edges were drawn to the wrong asymptotic-limits. Editorial: those edges are regime tests for option-premium-analysis, not chart decoration.
- Put option-elasticity does not asymptotically fall to -100 as the underlying price tends to infinity.
- Call option-elasticity does not asymptotically fall to 0 as the underlying price tends to infinity; it asymptotically falls to 1.
- Call percent-theta does not asymptotically fall to -100 as the underlying price tends to zero, and put percent-theta does not asymptotically fall to -100 as the underlying price tends to infinity.
- Editorial: far-spot option-elasticity and percent-theta edges are regime tests for option-premium-analysis, so a wrong asymptotic-limit misplaces the overlay as the underlying trends.
What the correction reset
A published correction to option-moneyness charts was issued because drawing mistakes in two option-premium charts could produce misunderstandings of limiting option-elasticity and percent-theta behavior.
The correction states that put option-elasticity does not asymptotically fall to -100 as the underlying price tends to infinity. It also states that call option-elasticity does not asymptotically fall to 0 as the underlying price tends to infinity. Call option-elasticity asymptotically falls to 1.
The same correction states that call percent-theta does not asymptotically fall to -100 as the underlying price tends to zero. Put percent-theta does not asymptotically fall to -100 as the underlying price tends to infinity.
Far-spot edges inside option-premium-analysis
Option-premium-analysis reads premium, option-elasticity, and carry against cross-market prices and portfolio weights so one options trade can be placed in a weeks-to-months regime context.
Moneyness is where the strike sits relative to the current underlying price. It is the setting for reading premium, option-elasticity, and decay together. Option-elasticity is the relative sensitivity of an option premium to a move in the underlying price, used to place a contract in a trend or volatility regime. Percent-theta is time decay expressed as a share of the option premium, used to judge carry as spot moves far from the strike. An asymptotic-limit is the value option-elasticity or percent-theta approaches as the underlying price tends toward zero or infinity.
Editorial: those far-spot asymptotic-limits are how the overlay is scored when the underlying trends away from the strike. A wrong far-spot number assigns the wrong trend sensitivity and the wrong carry to the same contract. That is a regime-reading error, not a cosmetic chart fault. This reading is editorial and is not an archive claim.
All readings on this track · 10 readings
- 1998Strike selection from a return distribution and implied volatility
- 2004Constructing an index-options overlay with dividend premiums and open interest
- 2005Implied volatility and price divergence as a sentiment regime filter
- 2007Ranking short options by premium, margin, time, and delta
- 2008Bull put spread construction under elevated implied volatility
- 2008Net time-value ranking for conversion spreads
- 2008Out-of-the-money commodity credit spreads in a volatility regime
- 2012Far-spot option-elasticity and percent-theta limits
- 2012Weekly debit spreads and volatility regime matching
- 2018Constructing option strikes from intrinsic and time premium