newbie question on option pricing and possible crash

Discussion in 'Options' started by trc4949, Oct 31, 2009.

  1. trc4949


    Hey all,

    I probably should not be trading options since I am still so amateur with the pricing.

    Anyway I have the XLF December 14 Puts

    and I am wondering how I calculate what the option price would be in a stock market crash scenario?

    I don't know how to figure out how much premium is added to the price of the option if volatility skyrockets. Volatility adds to the price of the option right ?

    Lets say I am correct that the stock market crashes going into end of this week where we see XLF hit a price of 10.

    So then I would be 4 dollars in the money and there would be premium added because there is still time left till expiration in December...

    but then how much would I add to the price for the fact that the price of XLF gets there in about 4 days in panic crash fashion?

    I wonder how much the price of the options increased during the epicenter of the 1987 crash on October 19th.
  2. Jesus


    What you need is a good P/L (profit loss) options tool. Any decent options broker should have one. I use the one with options house.

    When you use this tool, you can input your options that you bought (or sold), and see how much profit or loss on that option you would have if the underlying went to any price you want to look at, at any date between now and the options expiration date. Also there is should be something where you can tweak the volatility to see how it would effect the option.

    Find one of these tools and take a few minutes to learn how it works.

    You could also look at the vega, which is the amount an option will gain (lose) for every percentage of volatility the underlying gains (loses). That could give you your answer as well.

    Also, you cannot predict volatility easily. Keep that in mind, there is no magic tool that will tell you what volatility will be. Market could go down sharply and volatility could go nowhere. Vise-Versa. Its not like theta (time value).

    Lastly, it is clear you do not have much knowledge about options. This is not a bad thing, it doesn't mean your stupid. Just slow down and take the time to learn options inside and out before you risk a lot of money on them. Read a beginners book, or internet articles on sites like investopedia, and slowly work your way up to more advanced articles and books before risking your savings or anything else. Trade paper money right now or use very SMALL amounts of money. Just my 2 cents. Take it or leave it.
  3. You can do some scenario analysis by playing with the various inputs, as suggested by the previous post.

    If you also want to get a guide to the behaviour of volatility, you can look at a historical time series of some vol proxy, such as the VIX. Behavior of this proxy during different past regimes (not just the 87 crash) can provide you with some insight about what MIGHT happen to vol under different scenarios. This can then inform your scenario analysis and help you refine it.
  4. trc4949


    thank you for the detailed answer.

    good trading to you...
  5. dmo


    You need to have a thorough understanding of implied volatility and option pricing. I once created and posted a video explaining those in some detail, you can watch it for free at
  6. lrm21


  7. A+
  8. can you give the time and date, price paid or credited of your dec 14 xlf put
  9. YES it is.

    No one should be trading options without a good understanding of how they work.

  10. Jesus


    I agree with you. I meant that it isn't a bad thing, because everybody has to start somewhere. Everybody who has ever traded options started out at the same point, knowing very little. It is not a bad thing to not know options and want to trade them, you just have to learn them inside and out first. I didn't want to discourage him and just say, "you don't know options so quit trading them idiot." But I do agree he should not be risking much money, if any. That is why I said in my first post that I think he should be paper trading or use extremely small amounts of money right now before he gains a greater understanding.
    #10     Nov 1, 2009