Q&A

Are Options Overpriced?

Monday, March 6, 2006, 6:48 AM ET

Q. Does this mean that the option is overpriced if theoretical price is $0.46 and actual price is $1.35?
A. Not necessarily. It holds true only if the stock price…

Q. Does this mean that the option is overpriced if theoretical price is $0.46 and actual price is $1.35?

A. Not necessarily. Every market situation needs to be analyzed separately.

It holds true only if the stock price won't change significantly and actual option prices will start to tend to their theoretical levels. But if the stock price drops or surges as anticipated by the market, then theoretical prices are the ones far from reality. There is a special class of option strategies when the trader bets on volatility change and the corresponding change of disparity between theoretical and actual option prices. Learn more about these strategies here . 

You can also find our short-term picks for "volatility" strategies on our site on a daily basis. Also please take into consideration the general market volatility trend that we compute and publish on our main page. It would be more risky to bet on a particular stock volatility drop if the market volatility is on rise.