Stock option dynamics

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galway_blow_in

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Say I own a Friday 22nd ( tomorrow) call in worlds best company ( made up fictional company) and the current underlying stock price ( right this minute) is say $ 215

Provided the stock price remains around this price ( approximately) , should the option call price remain the same price or does it automatically rise in value the closer we get to the closeout point which is 9PM tomorrow evening ( New York stock exchange) ?

Can't decide whether to close out now or wait , not intending to buy 100 shares but stock option is higher today than it was yesterday
 
If the stock price remains the same the option value will fall, whether it is a Call or a Put. If it is at the money the fall would be 100%. If it is far off the money, there will be little change, if it is far Out its value should be zero and if it is far In its value should be its intrinsic value, which by assumption won't change.
 
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Duke of Marmalade said:
If the stock price remains the same the option value will fall, whether it is a Call or a Put, but it can't fall very much in one day.
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Why will it fall ?

Does approaching close out point ( 9pm tomorrow night) not drive price higher ?

I.e , if stock underlying price was same three days ago , we are further out from close out point ( tomorrow evening) ?
 
Say I bought puts $ 277 in a stock two days ago when underlying price was $347 and underlying price right now is $217 , with closeout tomorrow at 9pm , will put be worth more tomorrow the closer we get to 9pm if underlying price remains $217 than the Put price is valued at right now with underlying stock price @ $217 ?
 
galway_blow_in said:
Say I bought puts $ 277 in a stock two days ago when underlying price was $347 and underlying price right now is $217 , with closeout tomorrow at 9pm , will put be worth more tomorrow the closer we get to 9pm if underlying price remains $217 than the Put price is valued at right now with underlying stock price @ $217 ?
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Well in this example you are very far In the money. The Intrinsic Value is 60 and there is effectively no Time Value. If the price doesn't change the pay off will be 60, which is its current Intrinsic Value.

Now if its current price was $270 that is a different kettle of fish. The Intrinsic Value is €7 but there is still some Time Value left. Back of the envelope calculations might say that there is a 50/50 chance the price will move 10 either way. If it falls 10 you gain the whole 10 but if it rises 10 you only "lose" 7. It is an asymmetrical situation and the Time Value would be about 50% of 3. As time passes the 50/50 possible price moves shrink and so too does the Time Value.
 
Duke of Marmalade said:
Well in this example you are very far In the money. The Intrinsic Value is 60 and there is effectively no Time Value. If the price doesn't change the pay off will be 60, which is its current Intrinsic Value.

Now if its current price was $270 that is a different kettle of fish. The Intrinsic Value is €7 but there is still some Time Value left. Back of the envelope calculations might say that there is a 50/50 chance the price will move 10 either way. If it falls 10 you gain the whole 10 but if it rises 10 you only "lose" 7. It is an asymmetrical situation and the Time Value would be about 50% of 3. As time passes the 50/50 possible price moves shrink and so too does the Time Value.
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I'm not smart enough to work that out to a competent degree so I closed out the option, gain of $5800 from a $157 stake two days ago

If its worth $ 7000 tomorrow evening, so beit

I do understand that if the underlying stock price was $200 tomorrow evening, the put would then be worth $77, I was just wondering if the correlation is greater as you approach close out time even with underlying price remaining the same as now

If I'm reading you correctly?, should underlying stock price be $217 at 9pm tomorrow evening, Put price should not be any more valuable than it is right now with underlying price at $217 ?
 
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galway_blow_in said:
I'm not smart enough to work that out to a competent degree so I closed out the option, gain of $5800 from a $157 stake two days ago

If its worth $ 7000 tomorrow evening, so beit

I do understand that if the underlying stock price was $200 tomorrow evening, the put would then be worth $77, I was just wondering if the correlation is greater as you approach close out time even with underlying price remaining the same as now

If I'm reading you correctly?, should underlying stock price be $217 at 9pm tomorrow evening, Put price should not be any more valuable than it is right now with underlying price at $217
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Gosh so this is a real example!
Your figures seem so amazing I don't think I fully understand them. What do you mean by a €157 stake.? How could that grow to €5,800 in 2 days?
Sticking with the example you cite, whether illustrative or real, the fact is that your optionality has no effective value. You will only not exercise the option if the price rises from $217 to $277 in the next day, which is surely a negligible possibility, so the situation is really no different than if you had contracted to sell at $277 with no opt out.
 
I never intended to exercise the option

I paid $1.57 two days ago for the April 22nd $277.50 Put
 

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galway_blow_in said:
I never intended to exercise the option

I paid $1.57 two days ago for the April 22nd $277.50 Put
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Absolutely brilliant.:p In effect you finished with a str8 short position on Netflix which must have fallen even more since you closed, but as I say your option had effectively become a str8 short. Don’t blame me if Netflix continues to fall.
 
Duke of Marmalade said:
Absolutely brilliant.:p In effect you finished with a str8 short position on Netflix which must have fallen even more since you closed, but as I say your option had effectively become a str8 short. Don’t blame me if Netflix continues to fall.
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Not a short ,max exposure was $157 , I bought a Put ,selling one a different story as is regular selling short where downside limitless
 
galway_blow_in said:
Not a short ,max exposure was $157 , I bought a Put ,selling one a different story as is regular selling short where downside limitless
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I know you didn't start with a short but that is effectively how it finished. You should ignore the history of your exposure. Your current position was that you were up over $5k and that was your exposure, the $157 was history. You were effectively totally exposed to the upside i.e. an exposure of over $5k as it was extremely unlikely that Netflix would recover all its recent losses in the next 24 hours. It was a brilliant "bet" no doubt.
 
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You beat Bill Ackman that's for sure.

I agree though that buying a put isn't the same as a short because your downside exposure is limited to the premium.
 
I see it finished at $214 so your decision to Square early cost you c. $300. I hope you don't hold me in any way to blame:(
What inspired you to do this? Is it a one off or are there many more which "missed"?
BTW I know that options are not the same as Long/Short positions but as they get further in the money they approach these positions. With a day to go your Put was so far in the money that from a pricing point of view it was a short.
 
Duke of Marmalade said:
I see it finished at $214 so your decision to Square early cost you c. $300. I hope you don't hold me in any way to blame:(
What inspired you to do this? Is it a one off or are there many more which "missed"?
BTW I know that options are not the same as Long/Short positions but as they get further in the money they approach these positions. With a day to go your Put was so far in the money that from a pricing point of view it was a short.
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Oh believe me, option trading is pure gambling, its not investing, I have thee odd flutter, usually small amounts, made 2k over a year ago on a FB option trade, the trick for a big score is to trade around earnings ,buying physical is very risky prior to earnings but an option is obviously cheaper if far out of the money

I don't do it that often and rarely make more than 50 or 60 quid
 
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