Options premium confusion

Discussion in 'Options' started by armpit, Jul 20, 2006.

  1. armpit


    Hey guys, I'm new to options and I havea quick question. Before the Ebay earnings call yesterday I purchased an AUG22.5PPUT for 0.55 and an AUG30CALL for 0.45. Well this morning the stock went up close to 5% and then dropped to -2%. What I don't understand is that my options lost 60-75% of their value into either direction of the stock. How can the premiums lose so much in just one night when it expires in August. Any feedback would be appreciated.
  2. You need to look up the term "Implied Volitility". The earnings anouncement hit and the IV dropped across the board. So it would be possible to lose money even if you got direction right if it didn't move enough to account for the IV drop.
  3. Usually you will need a 10% move in the stock to profit from an earnings option straddle. To make up for your 70% loss the next "straddle" has to produce a 350% return. Very unlikely.

    I would stay away from this sort of trade.
  4. armpit


    Thanks guys, as you can see I am fairly new at this.
  5. armpit:

    You may want to consider closing your range on the straddle.

    EX: do put and call at same strike or 1 strike away. (assuming you are expecting a good move one way or the other)
    (It will cost more and it is tempting to go for the less expensive options when you start but try doing a risk graph and probability calculator with different ranges first to see if it is worth it.) You may find that spending a few more bucks will give you a better possible outcome... do a virtual trade on a few different straddle ranges and see what profits more often. If you have OptionsXpress you can trade all you want for free to see what works for you. (there are prob other sites that do the same thing but that is what I use).

    I agree with the IV advise as well.
    If you want to play with IV, then the calendar spread is something you should look into, (look for differences in front month and back month) but not something a beginner should mess with for a while.
  6. Tums


  7. zxcv1fu


    If you want to do earning plays, you should get into position like 2 weeks before the report. Otherwise the imp volatility increases before eaning & usually drop right after.

    I had the same thing happened to me a long time ago. After the earning AMAT moved to my way my options still were in red. Luckily the stock kept on moving to my way. After that I was very careful.
  8. You may also want to play with spreads if you're doing earnings plays. Since you're selling a contract it helps reduce the impact of the post earnings IV crash.