Hi All, I am a newbie in options and I have a question. I bought some EBAY May $35 Call options prior to the earning release 2 days ago. The stock price were at $34.10 and I bought the options at $0.93 The stock plummeted the next day but managed to recover most of its losses - But to my surprise, the options value did not recover and was currently trading at $0.53 (Stock Price $34.00) Anybody here can help me understand the rationale of these drastic drops? (Couldn't be Theta and Delta that is causing the drop, was it the volatility?) Your expertise will be greatly appreciated
Implied volatility collapse my friend... Implied volatility = "anticipation" Once the news result is released, well there's no more anticipation. You need more practice with options trading...
This happened to me when I first started trading options last fall. Right before an earnings announcement I bought some out of the money Apple calls, saw them triple in value.. and held them until after the announcement only to see them collapse in value. I attached an image of the implied volatility of EBAY calls from the past year. The orange line is implied volatility and the blue line is historical volatility. IV fell a little bit more than 5% which can kill the value of out of the money options. Here's a link to the CBOE's free implied volatility tool: http://www.cboe.com/framed/IVolfram...ADING_TOOLS&title=CBOE - IVolatility Services And here's a link to the CBOE's option calculator: http://www.cboe.com/framed/IVolfram...ADING_TOOLS&title=CBOE - IVolatility Services You can fool around with the implied volatility values to see just how much IV fluctuations affect an option's price. Hopefully that helps.