I have a newbie question for everyone here regarding option pricing. I bought a $12 put on BAC (BYOTL) a few days ago for $0.66 when the stock was well over $13. Since then the stock price has tumbled over $1 but I have only made about a 5 cent profit. In fact, my position was under water for some time while the stock price had dropped considerably below where it was when I bought the put. I know that options don't necessarily move in tandem with the stock price and that there is time decay, but I still do not understand why there would be that much of a difference between the stock price and the option price. Any help with this would be appreciated.
I just posted an educational option video on my site which answers exactly that question. www.masteroptions.com and scroll down to the video. The video lays down the foundation, then gives an example exactly like yours right at the end and explains why it happened.
Im assuming volatility has gone down as time decay for the August options would not have made a difference this far away from expiration.
some exchanges use something close to the Black and Scholes model. Worth reading if you want to see. http://www.derivativesone.com/kb/black_scholes.aspx
BAC had an earnings announcement last Friday. Even though the stock moved in your direction, the implied volatility got crushed.
its not that the exchanges use any particular model, its the member market makers who stream their quotes to the exchange systems who set the price. But, yea for equity options the Black Scholes model is pretty safe to use most larger firms tweek their own model based off that one or one of the other common ones.
Sure... something like a sub-prime mortgage crisis could definitely raise volatility a bit. Or maybe even another earnings announcement in 2+ months.
LOL, thatll do it. Perhaps you should read up a bit on volatility and options pricing..........just perhaps
Just finished watching your video and it explained everything perfectly. Your ARNA example was exactly like what happened to my trade. Thanks for making that video it was very helpful. BTW, when you were showing the ARNA example what was that platform you were using that showed all the IV numbers?