I bought the Spy jan 16, 91 Put on tues 16th. It gained .30 after todays drop. I was confused why after looking at the chains for the same expiration why almost all of the OTM puts lost value today after Spy was down almost 2%. I thought that as the price moves closer to the strike, granted its still a few weeks from expiration, that the option should gain in value. I don't know what the price of the options were during the trading day, I checked them today and looked at all of the closing prices. Don't know if that is a factor. As you can see I am rather new to options but I am learning, reading, and taking some chances. Thanks -Ray ps, just quick question... can you chart option contracts?
1 - you can chart option contracts, try thinkorswim platform for that 2 - volatility plays a big role in out of the money close to expiration options. look at vix today, dropped like 5%, the volatility on your options certainly dropped as well, causing them to lose value if the price movement is not very significant.
Closing prices can be misleading. The last option sale often doesn't correlate in time with the last trade in the underlying. Other reasons for weird EOD price relationships include closing at the bid or ask (particularly when ther's a large spread) and IV changes during the day (stock goes down and puts go down... and vice versa for calls). IMHO, there's nothing to be gained from charting options. It's just a derivative of the underlying and time is better spent getting the underlying right
thanks guys for the reply's. Its just that since I was not around today to see where the options price was I had no idea what potential I had. I don't know how volotile options are, without a chart or some sort of historical data I don't know where price has been and well as for today all I had to go by was EOD price. I know as I learn more about options I'll have better understanding where the price of the option goes relative to the volotility of the underlying.
Ray, You have two issues in your post, 1) Volatility in the underlying (price change) and 2) The implied volatility of the options which causes price change in the option unrelated to price change in the underlying If I understand what you meant by the potential of what you had intraday, look at the delta of the option. It will give you a rough estimate of the expected option price change per dollar of underlying change. Keep up the reading and it will eventually make sense. And if we don't make sense, keep posting
Ya know I was reading about the greeks and understood what they represented until I open up my trading screen and go to make a move. But thanks i'll keep an eye on the delta cause that makes more sense. Well since you guys dont mind me picking at your brains I have a couple more questions: When I have a feeling that the market is going to make a move I have trouble choosing my option. Let me explain. On tuesday right after the feds cut the rates and the market rallied I had a strong feeling the market was headed lower by the end of the week. 10-15min before the close on Dec 16 (Tues) when the market rallied and SPY was at 91 I bought a Jan 16 '09 91.0 PUT @ 5.15. Max loss on the trade is 515. I thought I'd opt for the ATM so as not to lose too much in time value if I'm wrong. The spy closed today at about 88. So the underlying moved 3 points lower since the inception of my trade and with an ATM PUT having a delta of about .5 I thought my put would be worth 1.5 more for a $150 profit. Boy was I wrong I exited my position with a $3 dollar gain. Correct me if I am wrong but I think that the volatility after the fed anouncement caused me to buy an overpriced option. "IF" that was the case would I have been better off being short a call having that same outlook but taking advantage of inflated prices? But even then I would be buying an over priced OTM call as a hedge to keep my loss at a $500 max. How do I avoid this? On friday 11/28 I bought 5 Dec 75 PUTs on the spy and wow I wasnt expecting such a move but on monday 12/1 the market tanked sending the spy down 8 points. With a sizeable move like that would I have been better off buying one or two atm puts? And what if deep ITM? I find myself watching the market and evaluating the charts and taking trades that I expect to close out in a few days regardless of the outcome. I am just having trouble choosing the best option.
mynd66, I think you are probably correct in your observation about the put you bought on the 16th. I looked at a chart of the VIX. Today it went to the low 40s and closed at 44.93. On the 16th before the Fed decision came out, it appears it was around 55-56 range. This means the overall volatility the market has priced in went down. Most likely that means some people were willing to pay quite high prices before the fed meeting in case there was a huge, huge plunge. Since that huge plunge didn't happen, option prices have since backed off, even if the market has fallen somewhat. That would certainly explain some of the reason the put didn't do very good. If you continued to hold the put and the market continued to fall, you most likely would then start to make better gains as long as Jan. expiration didn't come up too soon. BTW - This shows that the market CAN diverage from the idea that IV/VIX goes up when ever a market drops. Clearly there has been less panic in the market over the last few days then in most of Oct/Nov, so VIX fell even though the market hasn't done good either. Like you said, another thing you could have done was sold a call and protected that with a higher strike call for a bear call credit spread. The IVs on both calls probably would have fallen, but since you would have been a net seller, that would be OK for you. Imagine if you sell an overpriced out of the money call for $500 and buy an overpriced out of the money call for $250 and then IV plunges - both prices would fall and you would make money on that in general. As far as the best put to buy, i.e. ATM or farther out, etc. it is always a tough call and depends on factors such as time remaining, your personal objectives, etc. You should continue to study trades, maybe paper trade, etc. and continue to observe what you see. BTW - I usually would never recommend very short term options, but if you felt the market was destined to fall after the Fed meeting, another option would have been to buy Dec puts. They would have cost less and the same 91 strike would have moved just as far into the money and you probably would have had some OK gains. Also, you would still have the limited risk factor (albeit 100%) of the total money spent even if you were wrong. Hopefully this helps you understand a bit, JJacksET4
Technically, with an ATM delta of .5 you would have expected a bit more than a 1.5 gain on that 3 pt move because as the option goes more and more ITM, the delta increases. The reason that you didn't realize a profit was because IV contracted after the Fed meeting and that negated your gain. In your scenario where the underlying only dropped 3 pts, the bearish call spread would have outperformed the long Jan 91 put with an IV drop. But if SPY had dropped 10 pts, the put would have been better. With each strategy, better off depends on what transpires after execution. If you sell a spread in a higher IV environment, you overpay for the long leg. But since it is OTM and much lower priced, you overpay less than you are overpaid for the short leg that you sell. Don't get caught up in the little details (g). Only hindsight will tell you which option would have been the best purchase since it's the amount of the underlying's move that determines that. However, you can interpolate the "what ifs" from an option chain (ignoring time decay and subsequent IV change). The difference b/t your option price and the next ITM option will be the amount of gain for an underlying move of that strike difference. This is a lot harder to explain in words than to visualize so maybe some numbers... Suppose XYZ is 100 Jan 95p 3.30 Jan 100p 5.50 Jan 105p 8.50 Jan 110p 12.00 If you bot the Jan 95p for 3.30 and the underlying were to drop 5 pts immediately, you'd have a 2.20 gain (67%) If you bot the Jan 100p for 5.50 and the underlying were to drop 5 pts immediately, you'd have a 3.00 gain (55%) If you bot the Jan 105p for 8.50 and the underlying were to drop 5 pts immediately, you'd have a 3.50 gain (41%) On a single option basis, the Jan 110p makes the highest dollar gain. On a percentage basis, the Jan 95p makes the most gain. So the most bang for the buck on an equi-dollar basis is the OTM option. That's called leverage. Clear as mud?