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Unusual Behaviour of Far Call Options

The price behaviour of far-out-of-money call options may unusually differ from the price behaviour of the underlying instrument. The call price depends on the price level of the underlying and on its volatility. For stocks, and especially for stock indexes, when the price falls, volatility surges. When the underlying price falls the price of the call option should decrease, when the volatility surges it should increase. As a result of these opposite factors, the call price may show unusual dynamics.

The fresh example for call options on S&P 500 stock index.

In the point A, November SPX call with 2300 strike had the premium of $0.50. In the point B, after the index fell about 10%, the same call was... $0.50 again. In the point C, after index rebounded almost 5%, this call doubled its premium to $1.00. After, with price stabilisation, the call premium started to decrease and fell to $0.15, although volatility index VIX was pretty stable and S&P 500 even increased. The value of VIX mostly depends on put options premiums, and may not be accurate in reflecting the volatility dynamics of call options.

As you can see, it is possible to choose the expiration and the strike the way for the call to ignore the sharp decline of the underlying, or even to grow in this condition. So theoretically it is possible to use far calls for risk hedging, for building delta-neutral positions and for the contact with some unusual volatility aspects.

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