Ask HN: Is the options pricing model broken for deep GME OTM puts?

1 point

5 years ago

TLDR the value of puts with a strike price of less than $5/share has gone way up, despite the stock price moving in the opposite direction. Is this a case of a mispricing due to a model that doesn't take into account this level of volatility? (...and thus a great opportunity?)

I noticed that with the volatility spike of GME over the past few days, with it ripping upwards, the puts with a strike price of less than 5 dollars per share have also increased in value. My guess is that because the volatility is now so high, the model for pricing options now believes it much more likely that GME will end up with a very low (<$5) share price. For many of these put options, they are valued much higher than they were a month ago when GME traded much lower.

Here's the options chain for GME: pay attention to the puts with strike price of $1-$5. https://ca.finance.yahoo.com/quote/GME/options?date=1616112000&p=GME

And here's an example chart of a couple of the options in particular: notice their value increasing over the past few days even though the share price is now quite high:

https://ca.finance.yahoo.com/quote/GME230120P00002000?p=GME230120P00002000 https://ca.finance.yahoo.com/quote/GME210319P00005000/chart?p=GME210319P00005000

It seems like from a logical perspective, the fact that GME is now a household name and that the company can dilute their shares to raise capital means that although the shares might crash back down again, they are extremely unlikely to dip below $5 in the next year or two. The options are being priced as if GME is going bankrupt this year (...and it's definitely not).

Does anyone have a counterpoint to this? Why wouldn't anyone with capital to spare just be loading up on cash secured puts for an extremely low risk ~10-30% return?

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