beta vs. implied volatility

Paul’s response below (regarding the unimportance of a stock’s beta in the options world) prompted me to do a little online digging.  “You can’t believe everything you read on the internet,” but this brief description helped me sort things out:

“Beta and volatility are not comparable. Yes, in a broad sense you can say they both measure a stock's volatility and tendency to undergo large moves. But the differences are very significant.

Beta MEASURES the PAST volatility of a single stock when compared with the volatility of a group of stocks. IV is an ESTIMATE of FUTURE volatility for an individual stock (or group of stocks). Beta is RELATIVE and depends on the volatility of its comparative index (SPX or NDX for example), whereas when we talk about volatility in the options world, it is an independent measure.  In other words, beta not only depends on the volatility of the individual stock, but it also depends on the volatility of the group.”

If you’re interested in the full text (gory details) of the above discussion, it can be found at:

Bottom line:   Once again the Cool Dude is correct.


P.S.   I have a 400-page book on “Option Volatility & Pricing.”  As further evidence of the independence of beta and IV, the index at the back of the book does not even contain the word “beta,” but there are MANY references to “implied volatility.”

From: [] On Behalf Of Paul Madison
Sent: Friday, October 05, 2012 2:10 PM
Subject: Re: [cool_club] Update on FAST position

Leaning is always a good plan for all of us, especially since things are always changing.

I agree a session on Delta would be good and it should come ahead of Rolls as it is more broadly applicable.  

The only Beta I am aware of is the measure that is used for individual stocks and is not directly related to options.  It is a measure of a stock's long term volatility and it is relative to the overall market.  So a stock with a Beta of 1 has roughly the same volatility as the broad market.  A stock with a Beta greater than 1 is more volatile than the market and less than 1 is less volatile.  There are some different approaches to calculating Beta so it is important when comparing Beta values for different companies that you use the same source to make sure the numbers are consistent.  

Unless someone can tell me that there is a Beta that I should be aware of with options (which is quite possible) then I think we will leave that one alone for now.

As always, I appreciate the posts from all of you, as that is what makes this a great community.

Paul Madison

On Fri, Oct 5, 2012 at 2:32 PM, Malcolm Myles <> wrote:

Hi Paul,

My investment plan is Learn.  So, when I found out about Rolls, I read up on them and looked to see if it would apply to my position.  I'm happy to be called away at 44.00 on my calls, and I'm happy to buy back my calls at a profit and roll up or down (once I learn the rules) as the profits decide.  Money seeks the highest return.

I'm also not straight in the head on the implications of knowing the time premium vs the intrinsic premium of the option.  I know the definitions, just don't have a intuitive feel for the impact of their changes.  Time and practice.

Please add to the future lesson plan - Beta and Delta.  Mary Ann mentioned delta and I only know it from physics as the symbol of change as in, its not F=Ma that kills you, its the Delta a!



On 10/5/2012 6:06 AM, Paul Madison wrote:

Ron's analysis is spot on!  I really do not like to look at Rolls until the last day or two of the contract.  The reason for that is because the time premium is down to a very little. 

When I get a chance I will do either a post or a Cool_Club session on Rolls which is a more advanced topic.  

The main thing I will reiterate right now is if you are considering buying back an option at a loss then you may want to rethink how you are choosing your Call Strike levels.  You are not sticking with the game plan of being happy being called away which in my mind is critical for this to work.


On Oct 4, 2012, at 10:07 PM, "Elliott, Ron" <> wrote:



Your analysis of the FAST unwind possibility appears sound to me.  Another way of looking at the unwind is to do an APR calculation on the remaining time value of the Call.  I believe these were your numbers as of this afternoon:


                $44.54 share price

                $44.00 call (Oct 20 expiration)

                BTC premium of $1.60


So the time value portion of the premium is $1.60 - $.54 = $1.06.  The APR for that time value, share price, and expiration is about 54% [($1.06/$44.54)x (365/16)}.  That’s pretty high, so the conclusion is the same one you arrived at (i.e., don’t do the unwind now, but keep watching it).  But if, for example, the premium now happened to be $.70 instead of $1.60, then the APR would be only about 8% and you might say it would be worth it to close out your position by doing an unwind (BTC for $.70 and sell the stock for $44.54).  I’ve ignored commissions/fees in these calculations, but of course they should be factored in.


Again, this is simply an alternative way of framing the same analysis that you did.  I think that folks should use whatever approach makes the most sense to them.





From: [] On Behalf Of Malcolm Myles
Sent: Thursday, October 04, 2012 3:48 PM
Subject: [cool_club] Update on FAST position


An update on my FAST position. 

In August I took an open position on my existing holding of FAST.  I've owned the stock for some time, have double digit gains, feel that this level is unsustainable given the soft market and need to take some profits to offset some unfortunate losses, ie. capture the gains tax free.  I wanted to use covered calls to close the position so I can learn about option writing and do it in a manner that will be rewarding regardless.


Aug 20, 2012 STO 4x 10/20/2012 44.00 C @ 1.91
    Net income was $752.80
I've been reading a document from Charles Schwab "Managing Covered Calls".  It talks about what can happen after taking the position and some of the actions you can consider based upon realistic events.

1) Stock stays or drops, I can let the option expire worthless, or
2) Stock goes over strike, I can be exercised if the option is ITM at strike date/price, or
3) I can purchase the option back in a couple of different manners.

No action on my part for the first two, just let it happen.  Cool.  Made money, did what I wanted.

Third is a thinker position - I can close-out, unwind, rollout, rollout and up or rollout and down.  Wow, who knew!  I'll leave it to the Cool Guy to go over the different terms but suffice to say, they all involve buying back the covered call.  I was interested in the "unwind" which is buying back the covered call and selling the stock in the same order at the same time.

When a stock price jumps rapidly and above your expectations (FAST got two shocks up in the last week - Bernanke QE3 and then a positive manufacturing report Monday), it may be cost effective to buy back the covered calls and sell the stock at the market price.  You have to do the math, but the Cool Tool Covered Call Spreadsheet - "Closing the Option" tab already does most of it for you.

This is what I get today around 1pm PST:
     BTC 4x 10/20/2012 44.00 C @ 1.60
        Net STO $752.80   Cost to Close $651.20  Net $101.60 for an APR of 5% (not really great)

If I just let the call be exercised:
    Price + premium - assignment = per share proceeds of $45.86

The number I need to exceed to make the unwind be profitable is $45.86.  If I buy back the calls, it nets me $101.60.  I then sell the 400 shares of FAST at $44.54 for a net $17,807, total net = $17,908.65 or $44.77/share... near miss. 

I'd still be making a pretty decent profit on the trades.  However, it is worth the educational experience to me to ride this out some more and see what develops with the position.  If FAST continues to be above 44.00 but below 45.86, I'll get called away and make money.  If it goes down, I'll expire worthless or may be able to buy the calls back at a gain and write another call for November.  If the stock goes way up into 46-47 range, I'll do these calculations again and see if the "unwind" is the better plan.

Conclusion:  go back to reading, walk the dog, etc.