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Understanding LEAPS: Using the Most Effective Options Strategies for Maximum Advantage by Marc Allaire

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CHAPTER 22Overvalued and Undervalued Options

“Buy undervalued options and sell overvalued options.” This sounds like a straightforward strategy, maybe even a money-making one. How does one get started?

First, we deem it appropriate to define the meanings of over-and undervalued. Both of these terms imply a comparison between the current price of an option and another price: When the current price is higher than the reference price, the option is overvalued, and when the current price is lower, the option is undervalued.

As we saw in the previous chapter, of the five variables used to price options, only one cannot be measured objectively: volatility. So the discussion of overvalued and undervalued options boils down to a discussion of volatility. ...

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