Hi – I am quite new to options but am looking for some clarity. For a research essay I am analysing Mark Cuban's collar strategy for Yahoo stock in the early 2000s.
The basics:
Present stock value: $95
Put strike price: $85
Call strike price: $205
Time to expiry on both: 3 years
Some reports say this was costless, but this seemed odd to me, as my understanding was that typically the call should be nearer-the-money to account for the negative volatility skew often present in options markets.
So I did some (novice) application using Black-Scholes, which returned this:
Put Premium: 19.6
Call Premium: 14.1
This seems closer than I would have expected, and potentially something that could have been costless if assumptions were slightly tweaked to the present conditions at the time.
Am I missing anything or is this a relatively robust analysis? (At least for a new entrant to the world of options on an essay that isn't too technical)
Many thanks
Estimating premiums, and understanding volatility skews
byu/Expensive-Bag6867 inoptions
Posted by Expensive-Bag6867
1 Comment
You’d also need to state the risk-free rate assumptions to understand what is going on, particularly with a 3 year hold time. Knowing the deltas of each contract at time of open would also be useful.
Based only on what was written, I would agree with your first instinct. The call strike is ~20x further from the money than the put strike, in dollars. That would usually represent a much larger relative distance in delta from the money in the OTM direction, which should correspond to a proportionally smaller premium.
Now, given that this is Yahoo in the c. 2000, it’s possible that there was tremendous vol skew to the upside. It was pretty routine for CFOs of net stocks to talk about 100x P/E multiples as if those were table stakes. Irrational exuberance, and all that. So maybe in the historical context, the collar might have net to zero cost? It’s not impossible.