So I bought an OTM put contract for MSGN with a strike price of $15 yesterday, the price of MSGN went down 4% during the day and yet my contract only went up in value around $10 (the contract was $40 when I bought it). The expiration was only 2 weeks out so I was really confused as to why the price didn’t change much at all compared to the price move in the underlying stock, so I looked at the option chain and saw that there were quite a few contracts that had an open interest of 0. I figured that the reason my contracts didn’t change in value was because of low liquidity. Then I looked at the ITM put with a strike price of $20. This specific series had an open interest somewhere over 20,000. I checked the call with the same strike price and it had an open interest that was only a little less than the put. Obviously some institutional investor placed a straddle on this given stock but what I couldn’t understand was why their contract went up $63 whereas mine only went up $10. I understand the idea of intrinsic value and that my contract had none since it was OTM, but one would think that a price move down 4% in a day would make my contracts worth at least a little more. I’m not sure if my thinking is flawed but to me it seems like there’s a large amount of inconsistency when it comes to contract pricing, but I am pretty new to option trading so if someone could fill me in that would be great.
Have you tried just a straight-line delta calculation? E.g., the 18Oct 15P has a delta of 25, and was a bit lower when you bought it, so your option's participation in the price movement of the underlying is less than 1/4th. MSGN opened at 16.80 and closed at 16.32 on Friday, so even assuming you caught the full range, $10 sounds about right. The only (reasonably) successful option buyer I know always buys spreads with the long leg well ITM. Take a look at the deltas along the chain, and you'll understand why.
There are several factors at play here. The B/A spread on these puts is wide so minor price movements can easily be swallowed up within it. As Friday nears, option prices adjust for the weekend time decay, even more so as theta is increasing as expiration nears. That too eats up option price change. With MSGN at $16.80 at the close Thursday, the closing bid on the 10/18 $15 put was 20 cents (delta of about 30). MSGN dropped 48 cents on Friday so you'd expect about a 14 cent increase in the put. Your put's closing bid on Friday was 35 cents so the difference b/t theoretical and actual was one cent. There's no inconsistency there. The change in the price of the $20 put wasn't as dead on (42 cent expected versus 60 cents actual) but given that the B/A spread was 60 cents at Friday's close, there's a lot of wiggle room in there. And FWIW, unless you have some magical timing, consider buying longer dated options to give yourself more time for things to work out and diminish the effect of faster theta in the last few weeks.