How sensitive are equity option prices to changes in prices in their underlyings (large cap stocks)? The reason I'm asking is b/c I was looking at some option quotes on CBOE.com for stocks that moved big time (say 25% or so on a given day) and barely anything changed in option chains! I was under the assumption that if I happened to have a stock that was hedged with puts I'd be more or less limited from the downside risk. And yet the put prices bearly moved as the stocks plummeted. What's going on? Or is this protective put thing only gonna work over longer horizons? Thanks.
You need to understand the basics of option price models. It depends on the the underlying price, underlying historical/implied volatility, strike price, time left to expiration, and etc. (interest rate, dividend). To measure how the price of options move with underlying price and time, you want to check out greeks like delta, theta etc. Do not trade options unless you have some idea about these.
When a stock plunges 25%, ATM options become far ITM/OTM and the volume drops to 0. Ignore "last sale" and instead concentrate on "bid"/"ask" .
???? on what? Say some big cap gaps down 20% after the open. Assuming I had a hedge with ATM puts wouldn't I recoup much of that loss with what I gain on puts that are now in the money?
Come on man, I was just being simplistic. Trust me, I do understand the models, the greeks etc. In fact, that is the precise reason I started the thread b/c what would have been a perfect delta hedge in theory does not appear to work in practice at all. So getting back to your points, I do have a very good idea about those. The question has to do with reality not matching those ideas.
Thanks. I actually was looking at the bid/ask quotes too. But the changes there were just way to choppy and far between. Also, why would the volume go down? Wouldn't at least some people wanna liquidate their positions to capture the put gains etc? I would have thought the volume would actually go up given the extra action induced by the volatility spike and the abnormal volume in the underlying... Still confused.
That's what I was hoping the problem was. Thanks. Then again, if they are delayed, they could give more or less reliable data you'd think. Is there a good place with reliable option quotes that isn't very expensive?