What determines options premiums?

Discussion in 'Options' started by wentonchan, Apr 18, 2008.

  1. Hello,

    I'm currently a beginner at options trading and so far I'm using investopedia to try out options before I commit real money.

    What I can't figure out is how premiums are determined. For example, I bought 10 May 62.50 calls (.HONEA) before the earnings report for HON, and it had upward momentum after the report, yet the premium prices stayed down for most of Friday's session when, somehow, the premiums snuck back up.

    I've tried to find information at the OIC/888options, but haven't been able to find any information similar to this scenario. Any thoughts or ideas would be most appreciated. Thank you for your time.
  2. u21c3f6


  3. BobJones


    Sounds like what your taking about is changes in implied volatility. Before an earnings report the anticipation of a large move usually pushed the premiums up as traders buy options. Then after earnings are announced you generally see the premiums drop as the likely hood of a large move is over.
  4. Volatility goes down, and negates any gains due to price in underlying. (vega loss+delta gain =? no change).

    You would be better off starting the game of options by selling covered premium. It is "safer" as the probs are in your favour, and time/actual trading will teach you the behaviour of option price in practice. If you buy options, and you are not an expert trader, your chances of success are very low. You may ignore what I just wrote, but be sure that you understand the risks and what you are getting into.

    My advice to you is to first adopt trading methods that will bring in a "safe" rate of return first, and to forget about high rate of return. In other words, focus in your early stages on high probability of success and not on high rate of return.