today i was quite pissed off at how a couple of options i bought on nflx were "performing". i don't know if any of the options theoreticians here can venture any explanations for how some positions that i opened on friday where the underlying moved 4 to 14 points in my favor still showed losses for me practically all day. this past friday (6-VII-2018) i bought a couple of calls on nflx. first i bought a 180720c530 for 29 usd, nflx was at 404 at the time i made the purchase. later i bought a 180720c495 for 100 usd, nflx was at 408. financial indices worldwide have been inflated stupidly and aggressively higher the past 3 business days, so nflx opened around 416 today (9-VII-2018). for the first 20 minutes of the regular session both of my positions were showing positive profits but after nflx was sold below its opening price all of my positions went on to show losses for the rest of the day. nflx was never sold below 412 today, which means the underlying was at least 4 and 8 points in my favor all day. the damned thing closed around 418, a move of 10 and 14 points in my favor and my options were barely at break even. ¿how the hell does this happen? i created a directional position, the underlying moves roughly 3% in my favor and ¿i'm supposed to accept that my positions are still losing money, forget about not giving me any kind of profit? this makes no sense, the options i bought still have 2 weeks to expiration and the earnings announcement for nflx is still 7 days away. this is ridiculous, if a favorable 3% move won't make me any money ¿exactly what kind of trade will?
Study option IV. Not all options are equal. A 2.5% move on GOOGL will create significantly different results than a 2.5% move on NFLX.
I know you had that exact same position on LOL. So much for options as a directional trade. What you are experiencing is what I like to call the OptionsOptionsOptions effect... okay all jokes aside NFLX vol went up BUT time got closer to expiration. The option lost money because you held it over the weekend(there is a bit of weekend risk priced in on friday). Also the volatility surface screwed you up a bit. There is something called sticky delta, which means as your position got closer to ATM the implied volatility decreased as well. Look into skew/vol-smile. You could have paid the offer as well and the spreads widened. There are many things that could have gone wrong here. That is the beauty of options.
With options, the market makers set the prices and they have to manage their books. They will buy and sell as they see fit. It helps to understand the behaviour of the mm of whatever stock/underlying you are trading (eg nflx). I believe (and if someone More experienced can confirm) there are several market makers for stocks, especially the more popular ones. This is probably even more so with the advent of computerized trading. If you can, wait it out, if not, sometimes it's good to get out before it gets worse. That's part of the risk with directional trades.
well should have sold my put options.. LOL , rough 33% gain over weekend hold I believe you got hit with: 1. volatility lowering, 2. call being worth less then Friday, as you held for two more days that eat into time decay, 3. Daily market fluctuations .. ( even my puts didn't make sense to pricing with the flow of the day, but it is what it is ) you will see this on some strikes where people are playing a certain strike and will pull more from it then the adjoining two next to it, or vice versa where some pull in lower.. not always but every so often you see there where I just have termed it heated battles where they aren't aware of the pricing of the next strikes...?
Nominal deltas of far OTM options just prior to earnings are overstated. You need to calc your deltas on IV with earnings effect taken out. Your gain to delta was likely smaller than your loss to theta. BigShort, you've got it backwards. OTM calls generally roll up in vol to sticky delta as they move closer to ATM (unless NFLX skew is running opposite the usual direction or is showing pre-earnings smile). However the effect on call price from the roll-up is likely to be small 3-4 root-time sigma from ATM on earnings-immunized vol.
¿wth? nflx moved 4 to 14 points in favor of my positions, still barely broke even. That's why I never traded, and never will trade options. Too many factors that have an impact on the profits (or losses). Futures are far easier when it comes to estimate the evolution of profits/losses. IMHO most people start with options because they dream of big returns and have only limited capital available. In options you just risk the amount needed to buy it. And some options go up 100-200%... that's what they hope for. Alpha, beta, teta, binomial tree pricing model, monte carlo models, pin risk, counterparty risk... not for me.
Don't trade options as a directional play. If you're bullish NFLX, just buy NFLX. If you can't afford a round lot, you shouldn't be speculating to begin with.
You have the wrong strike and expiry on this one. NFLX releases earnings before the monthly expiry next week and that's also hurting your cause (or helping you break even). I've been playing this one too, but having to use weeklies to get around the problem you're describing. This NFLX play is particularly difficult for getting the correct contract to catch this move. If I were you, I'd chalk this up to a very cheap lesson (that is often very expensive), and get a better handle on price movements for strikes relative to each other and the same for expirations too.
You need to study pricing and greeks. Price went your way, delta was working for you. Vega and/or theta were working against you. Reducing one or both of those variables would have helped your trade. You are thinking in an equities mindset, one dimension, price. Options are multidimensional, price, time, volatility.