I think fixing this and putting in some sort of punitive effects for abuses are 2 different things that can be separated. Two different questions that can be answered. I'm just good with moving away from the way it's been done, which doesn't make sense to me anyway.
do i just not understand options or something? i've been given to think that when you have a put, that when the stock price goes down, the put price goes up. but my SKF puts have barely moved with an $8 change in SKF. i only bought it 24 hours ago so the time premium can't have killed it that badly. do out of the money options not move like other options? i figure if the price moves down $8, then the 70 put should be priced about like a 78 put was before the move, which would be about 4.10, minus a little time premium erosion. take even 20% of the 2.15 time premium off and i'm sitting at 3.70 or so. and yet the april 70 put is at 2.55 right now. why is my 70 put trading like a 71 or 72 put based on an $8 move in 1 day?
Why? There's a huge difference between preventing a bank from failing and their stock being worth a lot. If those assets are eventually worth very little, they are still going to have to mark them down. They just would do it over time instead of immediately, meaning it wouldn't crash the entire system all at once. If Bank of America is going to lose $50 billion on these assets, they are still going to lose that money. They will just write it down over the life of the assets as they fail instead of taking a $50 billion writedown today. Since they bring in net positive cashflows every year, writing it down over time means it can be written off against profits instead of causing a sudden credit crunch. If anything, changing M2M will save taxpayers quite a bit of money in the near future.
It's also fundamentallly different from what they were worth - which is what the banks want it to be even though it's no longer true. Let me clarify a bit by what I meant by "punitive" - I meant punitive in the sense that if you're going to make risky bets on insturments you don't understand, the you should be forced to be "penalized" by taking an unfavorable accounting treatment to err on the side of caution for investors and to deter companies from taking these kinds of risks. I don't like to read too much into moral hazard becuase it doesn't have as much real-world application as people think, but I think that in this case its very relevant. It's clear now that the old practice of makiing levereaged bets on assets that are poorly understood was stupid and silly - changing the accouting rules seems to send a negative signal that this type of behavior was acceptable after all. Just seems like another way to keep a bubble from deflating to me, and it robs what deterrent value M2M might have had in a post credit-crunch world (obviously it didnt' have enough before).
Options trade like anything else - they are worth what people are willing to buy them for. If there's less fear in the market, the premium you pay for the volatility might drop. Maybe yesterday, the Puts were priced for a big move due to FASB - now that the move happened, there's less potential volatility going forward, so the premium drops. (this is just a theory)
Except it doesn't. Their stock price isn't going to rise like a missile. It's going to rise because the possibility of failure/nationalization is likely eliminated. They will still suffer the same losses they would have otherwise. And yes, new regulations are coming to change how it works in the future. Except that's not what's happening. Changing M2M puts *less* taxpayer money in play, if anything. Because AIG and GM are totally different companies with totally different problems that involve totally different systemic risks. It would be idiotic to treat them the same.
Pardon me if I'm a hair skeptical. Changing rules to accomodate/hide "very bad things" is definitely perpetuating the status quo. No argument. I'll believe it when I see it. I don't think the punitive bit will ever be as firm as it should be. That will only work if people buy into the newfangled valuations. link Maybe.
How they expire or are executed has no effect on the volatility premium. If SKF is projected to be more volatile between now and expiration, the premium on the option is going to be higher. My guess is general volatility on the financial sector dropped today with the accounting rules changes. That would decrease the expected volatility on SKF, reducing that part of the price on the option.
But as you noted, it's not hiding anything. Everyone still knows this stuff is on their books. It just changes their capital requirement rules. That very well could be - but that fight will be fought down the road. It's a separate issue from saving the financials in the short-term. Punishing people now doesn't help fix the problem the rest of the non-financial world is facing. No - it's because the banks no longer have to liquidate those assets immediately. By changing M2M, the banks can leave those things on their books to appreciate down the road. It means the gov't doesn't have to buy up nearly as much in "toxic" assets, so the taxpayer has less money being investing. No one except the bank itself has to buy into the new valuations. But uncertainty in the market is OK - and in fact, probably a good thing to help the banks eventually do this right. The purpose of this is to keep the banks in business long enough to generate profits to cover whatever losses they may eventually have - not to make them profitable now in the eyes of the market. In yesterday's system, they had to write down future losses without having the future profits yet to counteract them.
Obstensibly, if investors don't believe that a bank is being honest about assets that are toxic, less investment should flow into said bank. Leaving the situation still stuck in the lurch. It's like adding T-mac to the rocket's active roster right now. Daryl Morey could claim to every paper in the country "woooooo look we added a offensive juggernaut to our team, look out lakers!" but every analyst in the country would know he's unable to play and continue to rank the rockets quite lower.
taking out the volatility factor, it would move more percentage wise with a decent move (like $8) than higher strike price puts. i just wanted it for one day (again didn't consider volatility premium reducing), certainly wasn't holding it to expiration. also, robbie, stop reading this thread so you don't think i'm too stupid to work at kershner and get me fired before i start.
I'm no options expert, but the delta on that put is -0.16, so for every dollar move in the stock, you can expect a 16 cent move in the option, correct?
back in the day (as in yesterday), it seemed like i should get around 25 cents for every dollar (negating bid-ask spread), but as far as i can tell i got, at one point, about 65 cents (bid went from 2.00 to 2.65 i think) for an $8 move (when SKF went down to $87) and ended up with 5 cents for $6 when i sold. so i guess by the end of the day, it was moving a decent amount for each dollar move, the volatility premium just killed me on the first 5 or 6 dollars of the move. or that seems to be the case.
well this thread confirms my fears. clean out your desk and be gone before this round of call of duty 4 is over!
