Question

what if the market that a lookback option is overpriced, how would you take advantage of it to make money?

Answer 1

If a lookback option is overpriced or any option which is overpriced, we can take advantage of it in the following ways:

1. Selling cash secured puts: It is important to sell cash-secured puts on a stock. for example if we own shares of stock of a company which is currently trading at $31 per share. However, you’d rather own it if it’s at $26 instead. we have to consider writing a cash-secured put for every 100 shares of the stock. If the stock is having a prior support at the $28 level, we should sell at $26 put if the shares pull back and take benefit from it.

2. when the stock market declines: We should sell put premium on stock market declines of 10 percent or more using index products such as the SPX or SPY. While double digit decline is rare, but they do happen and would provide opportunities to sell highly overvalued options