Options are a type of derivative contract that gives the contract’s buyers (the option holders) the right (but not the obligation) to buy or sell a security at a predetermined price at a future date.
The sellers of such a right charge a premium to option buyers. Option holders will let the option expire worthlessly and not exercise this right if market prices are unfavorable, ensuring that possible losses are not greater than the premium.
On the other hand, if the market swings in the direction of increasing the value of this privilege, it will take advantage of it.
Due to recent changes in the options market, Endo International plc ENDP investors should pay particular attention to the stock. Because Jan 21, 2021, $3.00 Put has among of the highest implied volatility of all stock options today, this is the case.
The Impact of Implied Volatility on Options
The implied volatility isn’t based on the stock’s previous pricing data. Instead, based on price fluctuations in an option, it’s what the market “suggests” the stock’s future volatility would be. This number, like previous volatility, is provided on an annual basis.
However, because implied volatility is forward-looking, it is usually more interesting to retail options traders than historical volatility. Implied volatility will rise as expectations rise or as demand for an option rises. Option premiums will be higher for options with a high amount of implied volatility.
Inversely, implied volatility decreases as market expectations decline or demand for an option declines. Option pricing will be lower if the implied volatility of the options is lower. This is significant because the price of an option’s time value will be determined by the increase and fall of implied volatility, which can affect the success of an options transaction.
What Are Analysts Thinking?
Options traders are clearly pricing in a huge increase for Endo International shares, but what is the company’s underlying picture? Endo International currently has a Zacks Rank #1 (Strong Buy) in the Medical – Drugs industry, which is in the Bottom 32% of our Zacks Industry Rank.
Four analysts have raised their earnings projections for the current quarter in the previous 30 days, while none have decreased their estimates. According to the results, the Zacks Consensus Estimate for the recent quarter has expanded from 50 cents to 66 cents per share.
Given the current sentiment toward Endo International among experts, this high implied volatility could indicate the emergence of a trade. Options traders frequently seek for options with high implied volatility to sell premium. Many seasoned traders employ this method because it captures decay.
The goal for these traders at expiration is that the underlying stock does not move as much as projected.
Option Profitability Scenario
- In-the-Money
If an in-the-money (ITM) option is exercised immediately, it will result in positive cash flow for the holder.
In a call option on the index, for example, the option is considered to be in-the-money if the current index value is higher than the strike price (spot price > strike price).
- Cash-On-Hand Option
An at-the-money (ATM) option is one that, if exercised immediately, would result in zero cash flow (no profit/no loss).
- The Out-of-Money Option
An out-of-the-money (OTM) option is one that, if executed immediately, would result in negative cash flow.
What Is Needed For Option Trading?
- Buyer of an Option – The one who by paying the premium, buys the right to exercise his option on the seller/writer.
- Writer/seller of an Option – One who is receiving the premium of the option and thus must sell/buy the asset if the buyer of the option exercises it.
- Call Option – An option that provides the holder the right but not the obligation to buy an asset at a set price before a certain date.
- Put Option – An option that provides a proper offer to the holder, the right but not the obligation, to sell an asset at a set price before a certain date.
