Corporate finance professionals have wondered how to optimize investment strategies for a long time, and the increasingly uncertain economic environment has made this issue even more critical. Studying the Mobitel strategy in the light of the theory of real options enabled Krychowski and Quelin to identify three major advantages of this approach.
Despite these significant benefits of the real options method, Quelin and Krychowski have found it to be little-used.
Philip Guziec, CFA, is a strategist on the alternative funds research team for Morningstar. Investing in options is a bit more complicated, but all of the complexity really boils down to a basic framework. The key difference between stock investing and option investing is the addition of a second dimension that is needed to put a price on an option, and that second dimension is uncertainty about the price of the stock in the future.
We can approach the uncertainty dimension for options like we approach the price dimension of stocks: Figure out a value for the uncertainty, and compare it with the price the market is actually charging for it.
There are more complexities to options investing, but the valuation of the stock and the valuation of volatility are the big hitters that should get you started on fundamental investing in options. To answer this question, Bertrand Quelin and Charlotte Krychowski have studied the use of real options.
1) Remove a degree of investment uncertainty, especially in the case of oligopolistic competition, where other players’ strategies can be modeled.
Just like the objective of stock investing is to buy undervalued stocks and sell overvalued stocks, the objective of options investing is to buy undervalued uncertainty and sell overvalued uncertainty.
These dimensions can have an impact on any options investment, and they open up the potential for the volatility structure trades discussed in the middle box of the Option Strategy Map. Quelin explains, “As with financial options, taking out a real option on a new activity consists of making a test investment to find out whether it is worth investing further.” Keeping track of the initial consequences of an operation should reveal whether it would be wise to continue.
So, an implied volatility that is too low means we want to buy the options and an implied volatility that is too high means we want to sell the options.
However, logical fundamental investing and risk tolerance often provide guidance on what duration or what strike to choose for a fundamental investment. In contrast, experimentation via the real options approach stimulates information sharing between sales, marketing, R&D, and finance teams, etc.
High speed trading regulation|
Trading options at expiration