Hey everyone! Just wanted to see if anyone can shed some light on this...paper trading straddles at the moment. Bought ATM put and call. Within a day of the trade, the stock had moved to the upside by 2 dollars. Strangely though, the put side of it had moved 1.50 against me(huge swing from where I bought it) and the call side only moved .30 in my favor so overall I am negative on the position. If someone could clarify why the put was so volatile and the call just remained flat, I would greatly appreciate it. I know there are factors of IV and Historical Volatiliy that could play a part, but dont know if that is all you need to consider. Thanks for any comments any body may have.
The two options may have lost a comparable amount of premium due to a drop in I.V., but the call gained intrinsic value, whereas the put did not.
Not the case here but if the UL was below the strike before the move, with a move up to strike the put would have lost more (intrinsic) than the call gained (extrinisc). But since you said ATM, the most likely explanation is a drop in IV.
This sounds highly improbable. Two guesses: 1) You bought incredibly high vola 2) The options were not in fact the ATM (50 delta) options. If you had the ATM call, it has a delta of ~.50 (which leads me to believe you didn't have the 50 delta call). That means your call should have gained close to $1 on a $2 move, minus vega loss, plus the call gaining intrinsic value (gamma gains) minus trivial theta losses if any. Google vanna. This is better asked on Wilmott.
If you mentioned the stock and the exact options you traded, someone could tell you exactly what happened instead of having 10 people guess.
Thanks! I appeciate every one taking the time to answer. Going back to newwurldmn's comment. The stock was BIDU. I did the 140 ATM call and put on 9/12 at 1:53pm eastern time. The stock was around 142 when I put the straddle on and 140 was closest to ATM. Bought the call at 11.5 and put at 9.35. At end of day 9/12 the stock had reached 145 then retraced just a bit to 144 and change. Next day at 9:30 at the open, the stock opened up at 144.61; the call opened up at 12.74 and put opened up at 8.4. By noon the stock was at 143.53; call was at 11.5 and put was at 8.2 and by 3:30 the stock was at 144.85; call was at 11.93 and put was at 7.47. So as you can see the call stayed between 11.5-12.5 but the put side deteriorated as the day went on. So my understanding of straddles has everything to do with volatility. So on the put side, I guess IV was extremely high and by end of day on 9/13 all of time value got taken out???? If yes, would a model(like black sholes) tell you this beforehand? Going into a straddle next time, how do you determine if an option is fairly valued so that I wont get burned with inflated premiums. Thanks again for taking the time!