How to not get ruined with options - Part 2 of 4

[newbiechristian552]

@michal613

Vega is how much your option price will increase or decrease when the implied volatility of the share price increase by 1%. If you bought some puts or calls, your vega will be positive, as your extrinsic value will increase when volatility increases. Conversely, if you sold some puts or calls, your vega will be negative. On the sell side, you want the actual volatility to be lower than the implied volatility to make money.

Sorry, I didn't quite track this. There are too many references / flips.

Is this all correct:

• If you "sell a put or call" that means you hold an option to sell those puts or calls and it goes through the same intrinsic / extrinsic valuation as a normal put or call
• The extrinsic value of the base puts/calls go up when volatility on the underlying stock increases
• The extrinsic value of the sold put or call goes down when volatility on the underlying stock increases because it inverts the intrinsic value of the base put/call (which just went up because of the extrinsic value increase due to stock volatility)
• Therefore it has a negative Vega

Basically, I'm getting a little lost because of the double intrinsic / extrinsic valuations.

 

[thatguy3]

@michal613

When one party exercises, the broker randomly picks one of the option sellers and exercises the contract there.

I was under the impression that they did this based on order of transactions. For example, if you were the first person to sell a contract, you would also be the first person to be assigned. Is this no longer correct?

 

[michal613]

@thatguy3 Good question, I read a bit more into it, and it is a bit unclear.

The answers I found say it follows OIC and brokers policy, it is mostly random allocation, but can also be first-in first-out. So it depends?