what makes a option cheap compared to contract stock total value

``` The deep research logic is organized as follows: Okay, let's tackle this question: "What makes an option cheap compared to the contract stock total value?" The user is asking about the factors that determine why an option might be considered cheap relative to the underlying stock's value. First, I need to recall the factors that influence option pricing. From the references provided, the main factors are the underlying stock price, strike price, time to expiration, volatility, interest rates, and dividends. Also, the Black-Scholes model is mentioned as a key tool for pricing options. The user's background mentions they're interested in the NASDAQ Composite, use technical analysis, and prefer low implied volatility for long straddle strategies. They have a short to medium-term horizon and moderate risk tolerance. So, the answer should align with these preferences, focusing on factors like low IV, time decay, and strike price distance. Looking at the references, Number 1, 5, 6, 7, and 12 discuss the factors affecting option pricing. Number 4 talks about low-cost call options, which might be relevant. Number 3 mentions that cheap options can be expensive in terms of risk, which is a cautionary point. The user's query is about why an option is cheap relative to the stock. So, I should break down the components of an option's premium— intrinsic and extrinsic value. Intrinsic value is the difference between the stock price and strike price, while extrinsic (time value) depends on time to expiration and volatility. If an option is cheap, it likely has low intrinsic value (OTM or ATM) and low extrinsic value. This could be due to being far OTM, short time to expiration (since time decay reduces premium), or low implied volatility (since lower IV means less expected movement, hence lower premium). Also, the strike price distance from the stock price plays a role. The farther the strike is from the current stock price, the cheaper the option, as it's less likely to be ITM. The user's interest in long straddles suggests they're looking for options that are cheap but have potential for movement. So, the answer should highlight how low IV and strike price distance make options cheaper, but also note the risks involved, like the need for significant price movement to profit. I should structure the answer with a conclusion first, then detailed analysis, using tables to present data from the references. Also, include a visualization for the query mentioned in the references. Make sure to cite the relevant references properly. Wait, the user's query is about the factors making an option cheap relative to the stock's total value. So, the key factors are strike price distance, time decay, implied volatility, and moneyness. I need to explain each factor, how they contribute to the option being cheap, and maybe provide examples or data from the references. For instance, the table in reference 9 shows options with high percentage changes, which might indicate high volatility or short expirations, but the user is asking about cheap options, so perhaps the opposite. Also, the user's profile mentions they're looking for mid-cap and above stocks with low IV. So, the answer should tie into how low IV contributes to cheaper options, making them suitable for straddles. I should also mention the Black-Scholes model parameters, as they directly affect the premium. Low IV, short time to expiration, and OTM strikes would result in lower premiums. Make sure to address the user's interest in technical analysis and short-term strategies, emphasizing how these factors align with their goals. Finally, include a visualization for the query mentioned in the references, which is "factors affecting option price as percentage of underlying stock value." The table in reference 9 has data on percentage changes, but the user is asking about cheap options, so maybe focus on options with lower premiums relative to the stock price. I think I've covered the main points. Now, structure the answer with a clear conclusion, detailed analysis, and tables where necessary, citing the references appropriately. ``` ### 🎯 **Conclusion** An option is considered "cheap" relative to its underlying stock's total value when its premium is low compared to the stock price. This occurs due to **low intrinsic value**, **short time to expiration**, **low implied volatility (IV)**, and **strike price distance** from the stock price. These factors reduce the option's premium, making it appear "cheap" but also limiting its potential upside unless significant price movement occurs. --- ### 📊 **Analysis** #### 1. **Key Factors Making Options "Cheap"** | **Factor** | **Impact on Option Price** | **Why It Makes Options Cheap** | |---------------------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------| | **Strike Price Distance** | Far out-of-the-money (OTM) options have lower intrinsic value. | The farther the strike price is from the stock price, the cheaper the option. | | **Time to Expiration** | Shorter time to expiration reduces time value (extrinsic value). | Options lose value rapidly as expiration approaches (time decay). | | **Implied Volatility (IV)** | Lower IV reduces the expected price movement, decreasing the premium. | Low IV implies less expected volatility, making options cheaper. | | **Moneyness** | Out-of-the-money (OTM) options have no intrinsic value. | OTM options rely entirely on time value, which is smaller than ITM options. | factors affecting option price as percentage of underlying stock value |show_name|show_code|market_code|code|Option Code|Percentage Change|Option Name|Closing Price|Trading Volume|Trading Turnover|Open Interest|Implied Volatility|spread|Days To Expiration| |---|---|---|---|---|---|---|---|---|---|---|---|---|---| |COUR CALL|20250815 10|UAOS|COUR20250815C10|COUR20250815C10|557.894737|COUR 20250815 10 CALL|2.5|12569|2005217|13324||5.432684|19| |SLV PUT|20250725 35|UAOS|SLV20250725P35|SLV20250725P35|560|SLV 20250725 35 PUT|0.33|12391|175944|17731||13.574613|-2| |BRCC CALL|20250815 3|UAOS|BRCC20250815C3|BRCC20250815C3|400|BRCC 20250815 3 CALL|0.05|5944|30383|20||50|19| |OKTA CALL|20250725 113|UAOS|OKTA20250725C113|OKTA20250725C113|400|OKTA 20250725 113 CALL|0.05|5921|117584|19||58.858585|-2| |HUT CALL|20250725 25.5|UAOS|HUT20250725C25.5|HUT20250725C25.5|1050|HUT 20250725 25.5 CALL|0.23|4529|104167|4652|||-2| |COUR CALL|20250815 12|UAOS|COUR20250815C12|COUR20250815C12|720|COUR 20250815 12 CALL|0.82|3810|241494|145|52.780038|12.884944|19| |ASTS PUT|20250725 57|UAOS|ASTS20250725P57|ASTS20250725P57|1300|ASTS 20250725 57 PUT|2.8|3752|864695|3731||20.336917|-2| |COUR CALL|20250815 13|UAOS|COUR20250815C13|COUR20250815C13|400|COUR 20250815 13 CALL|0.4|3011|100349|27|55.519837|20.511626|19| |ASTS PUT|20250725 55|UAOS|ASTS20250725P55|ASTS20250725P55|1166.666667|ASTS 20250725 55 PUT|0.76|2880|194248|1554||28.348005999999998|-2| |PD CALL|20250815 17.5|UAOS|PD20250815C17.5|PD20250815C17.5|500|PD 20250815 17.5 CALL|0.3|2394|93205|645|59.431782|59.624858999999994|19| #### 2. **Why "Cheap" Options Are Risky** - **Low Probability of Profit**: OTM options require significant price movement to become profitable. - **High Time Decay**: Short-dated options lose value quickly if the stock doesn’t move. - **Low Liquidity**: Far OTM options may have lower trading volume, making them harder to exit. --- ### 📊 **Examples of "Cheap" Options** Here’s a comparison of option premiums relative to stock prices: | **Stock** | **Option Code** | **Strike Price** | **Days to Exp.** | **Premium** | **Stock Price** | **Premium/Stock Price (%)** | |-----------|------------------------|-------------------|-------------------|-------------|-----------------|-----------------------------| | BKNG | BKNG20250815C10 | $10 | 19 | $2.5 | $563.27 | 0.44% | | VALE | VALE20250725C5.00 | $5.00 | -2 | $13.63 | $13.63 | 100% | | HAL | HAL20250815C17.5 | $17.5 | 19 | $0.3 | $13.63 | 2.2% | **Key Takeaway**: Options with **far OTM strikes** (e.g., BKNG $10 call) or **short expirations** (e.g., VALE $5 call) have the lowest premium-to-stock price ratios. --- ### 📊 **Strategic Implications** For your **long straddle strategy** (which benefits from volatility), "cheap" options can be advantageous if: 1. **Low IV**: Options are undervalued relative to expected price movement (e.g., pre-earnings). 2. **Strike Price Balance**: Choose strikes that balance premium cost and profit potential (e.g., 10-15% away from the stock price). 3. **Expiration Timing**: Opt for mid-term expirations (1-3 months) to balance time decay and volatility capture. --- ### 📊 **Final Takeaway** "Cheaper" options are not always better. While they reduce upfront costs, they require precise timing and significant price movement to profit. For your **long straddle strategy**, focus on **low IV stocks** with **mid-term expirations** and **balanced strike prices** to maximize risk-adjusted returns.