Simple Options Question

Discussion in 'Options' started by urrterrible, Jan 26, 2009.

  1. Fellas,

    I am an options noob so I am charting AAPL options to learn how price moves.

    At end of day on Jan 21st AAPL was at 82.83.

    Feb 80 Calls were at 7.45
    Mar 80 Calls were at 9.35

    Next day AAPL goes to 88.36 or 6.68% increase.

    Feb 80 Calls were at 10.50
    Mar 80 Calls were at 13.10

    The stock went up 6.68% and the calls went up ~40%. Why the huge difference?

    Then Friday the stock doesn't move and both calls lose 4% and 9% respectively(does the Feb call now lose less because it is ITM and earlier to expire?)

    Today Stock moves up 1.4% and calls move up 8.1% and 8.8%. I kinda understand this move, but not totally why it is so much more than 1.4%.

    Thanks for any help.
  2. The first part is delta, if the stock doesn't move and the option is cheaper then it should be theta. You should card up the greeks, delta, theta, etc.
  3. urrterrible,

    I am going to assume your numbers are right first of all (They look reasonable). If AAPL moved up 6.68% and the calls jumped 40%, that is fairly normal - that is the leverage that calls offer. Also, when a stock doesn't move, calls are likely to drop somewhat as time value decays.

    To determine exactly how much an option should move based on a given stock move, you need to learn about the Delta. Delta is usually about .5 for a near-the money option (however, delta changes as stock price changes). Delta says how much the option will go up if the stock goes up $1.

    So, if a stock is at $80 and an 80 strike call is $4 and the delta is .5, and the stock then went up $4, the option would be expected to go up $2, which would then be up to $6 or a 50% gain even though the stock only went up 5%.

    Delta is usually close to 1 for Deep in the money calls and close to 0 for far out of the money calls. Delta is negative for puts.

    Calls and puts make large percent gains and losses compared to the underlying stock - that is what they are for - leverage.

  4. The reason that the calls didn't go up as much as expected was because AAPL reported earnings after the close on 1/21. So while the options were going up because the stock was rising 5+ pts, IV was contracting. The reason for the Mar call dropping more on Friday than the Feb was that the Mar IV contracted more.
  5. Do you understand any of the answers given to you? They are good answers, but they all use option terminology that is probably unfamiliar to you.

    In case you are unaware, many factors affect the price of an option and you cannot chart them as you might chart stock prices.

    The term delta was used: Delta represents 'share equivalence.' In other words, if you own a call option with a delta of 40, you can anticipate (over a short-term move) to make or lose as much money as if you owned 40 shares of stock.

    That's not gospel. That's an approximation. I'm telling you this so you can get a feel for delta. But delta is not constant and changes as the stock moves. We don't have to go any further at this point, but you need a basic understanding of options and how they work so that you can make sense out of what you are trying to accomplish.

  6. Thanks guys. I don't totally understand the greeks but I am kinda familiar with them. I know the difference, but I really needed to track some stocks and ask some questions as the price moved to see how the greeks work in real time.

    Just reading about everything was not helping me as much I do not think.

    I might post a few questions here if yall don't mind as AAPL changes and I will try to answer the questions myself, and you can all SLAP me around with a dead fish ;)
  7. OK. Here's an example:

    The stock rises and the calls move much less than expected.

    Theta plays a small factor.

    Obviously delta was overwhelmed by other factors.

    Vega probably played a role as it's likely that implied volatility decreased.

    And don't forget that a sudden influx of orders can play a role in the options rice. That normally show up as a vga change.

    With overlapping factors, it's difficult for me to see how charting the price is going to let you see anything about any specific greek, when they each simultaneously play a role in determining the price of an option.

    Best of luck. I hope you do learn something useful.