What causes 2 moves of the same size to have 2 different outcomes ?

Discussion in 'Options' started by Aston01, Apr 25, 2012.

  1. Aston01


    I was hoping someone might be able to help me understand why the same magnitude of volatility adjusted movement in 2 different stocks can cause totally different effects on their respective options?

    I am adjusting for IV using a formula like this

    But I find that if I look back at historical data for situations where a volatiity adjusted 3 standard deviation move occurred the effect on the respective options is some times different.

    For instance I can look at a call 1 strike OTM on AAPL and if the stock makes a 3 deviation move that particular call may increase in value 300%

    Using the same circumstances lets say FSLR ($18 share price) makes a 3 deviation move and the 1 strike OTM call may move 500% or it may be 80%.

    I understand the following factors play a role -
    • There are different degrees of leverage depending on the proximity of the strike.
    • The number of strikes crossed in the move can play a role
    • IV can be cranked up or down during a move.
    • I have a feeling liquidity plays a role in price outside of affecting slippage (just not sure what else it affects)

    I am always trying to improve my understanding and I was wondering if there is something else I am missing?
  2. dom993


    Would basic supply/demand not apply? I mean, if there is little interest in a particular market, it is more likely to be price erratically.

    In your examples, how did the open interest & volume traded compared?
  3. Implied volatility is a value calculated from the market price of an option. That market price is the result of supply and demand. As such, the implied volatility represents, roughly, the consensus forecast of future volatility. Roughly, that is, to the extent the market is efficient and the option pricing model accurate.

    In any case, a big move in some cases may cause people to think that future volatility will increase, and in some cases may cause them to believe that future volatility will decrease, hence the difference in outcomes.