Rich / cheap
Definition · Level 2 · Long options & hedges
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Desk slang for an option priced high or low: against the move you expect the stock to make, against its own usual level of implied volatility, or against parity. A high-priced option needs a bigger move to repay you.
Example
“Vol is rich into earnings: the options price a 9% move, and this stock usually moves 5%.”
Where Tradecraft teaches it
Level 2 · Long options & hedges, in the lesson “Time, volatility and being right but losing”: Time and volatility can sink a long option even when you pick the right direction.
Related terms
- IV crush (vol crush)The sharp drop in implied volatility right after a scheduled event (earnings, a drug ruling) resolves the uncertainty, deflating time value.
- Time decay (theta)The daily erosion of an option’s time value as expiry approaches, all else equal: a cost to buyers, income for sellers.
- VegaChange in an option’s price for a 1-point change in implied volatility; largest near the money and, for those options, rising with time to expiry.
- ArbitrageLocking in a profit, riskless in principle, from a price discrepancy by simultaneously buying the cheap side and selling the rich side of equivalent…
- Borrow feeThe annualized fee a short seller pays to borrow shares (and a lender earns); small on easy-to-borrow names, large on hard-to-borrow ones.
- CollarOwn the stock, buy a put below and sell a call above.