Spread trades extending from morning to afternoon are possible by using the analysis shown in “July grains” (below), which includes price charts for July wheat, corn and soybeans. In each chart, the market prices and predicted prices are close to the theoretical price curve for large strike price (out-of-the-money) options. This is true for both a.m. and p.m. prices. However, when strike prices are smaller and the calls are near to or in-the-money, the variations are much larger in the morning and smaller — closer to the price curve — in the afternoon.
The ability to profit from this type of analysis depends on whether the morning and afternoon prices shown are actually available for trading. A suggested method is to compute the regression price curve based on listed prices early in the trading day and create spread trades with long options that are under-priced and short adjacent over-priced options. When plus and minus variations alternate through the list, some calls will be paired with more than one in the opposite direction. Spread trades in the area of smaller strike prices should be more profitable because of larger variations from the predicted curve.
It is tempting to think that variations could be picked out of an option price chain simply by drawing a line though the prices as they curve up with smaller strike prices; however, “Calls on July oats” shows why this may be an impossible goal. Computer analysis may be required to show magnified variations — even at the relatively small $50 per point given by grain options.
As always, the organization and pricing in the options market is impressive. Traders in general are able to trust relationships among pricing variables that have at least four decades of experience with an ever-expanding options market.
Paul Cretien is an investment analyst and financial case writer. His e-mail is PaulDCretien@aol.com.