Buying deep OTM puts

[Bry]

Thank you gentlemen, I appreciate the replies. The day I bought the puts the ASX200 was just above 5200 and the day they were 14 points it was trading 5120.

QD, what was the strike on your puts?

 

[Quant Dracula]

QD, what was the strike on your puts?

On 21 Aug purchased 4150 puts expiring 17Sep15, paid 2 points. The date they were 14 was 24th Aug.

 

[lawrence-lugar]

Only a few days later I was shocked to have seen these puts balloon in value from 2 to 14 points when the underlying had only moved down about 2%.

Dracul

Sounds great. What is your profit/loss statement from this move, %-wise

 

[Quant Dracula]

Sounds great. What is your profit/loss statement from this move, %-wise

Hi - like I said in my original post, these were part of a spread I had in place, not an outright buy. I held these into expiry and they expired worthless.

 

[VTS]

When the VIX goes from a 13 handle into the 50's in a week, you'd expect some off the charts high standard deviation moves in most underlying's including options. So the fact that your OTM put skyrocketed in value isn't surprising.

I guess in your case what's more important is, what spread was the put a part of, and how did the spread do? Maybe you could provide more information. I'm curious why you'd hold anything to expiry.

 

[debitspread]

Bry - yes you are right. My question pertains to the reasons for a 7-fold increase in the price for an option that was still way OTM on a comparatively minor move in the underlying.

The term you're looking for is "elasticity" or "gearing," although deep OTM options are really a vega play, not a delta play.

https://en.wikipedia.org/wiki/Greeks_(finance)
Lambda

Lambda,

, omega,

, or elasticity [4] is the percentage change in option value per percentage change in the underlying price, a measure of leverage, sometimes called gearing.

 

[Bry]

On 21 Aug purchased 4150 puts expiring 17Sep15, paid 2 points. The date they were 14 was 24th Aug.

The price plunge took place from Aug 20-24. You might have a market timer in you!

 

[Quant Dracula]

The price plunge took place from Aug 20-24. You might have a market timer in you!

Ha ha, unfortunately it was pure dumb luck.

 

[Quant Dracula]

When the VIX goes from a 13 handle into the 50's in a week, you'd expect some off the charts high standard deviation moves in most underlying's including options. So the fact that your OTM put skyrocketed in value isn't surprising.

I guess in your case what's more important is, what spread was the put a part of, and how did the spread do? Maybe you could provide more information. I'm curious why you'd hold anything to expiry.

Thanks for replying - the rest of the position was nothing really particularly interesting. I had some 85% long puts that I bought earlier in the year with Dec15 expiry and they had been bleeding down in value so when the market dipped I took the opportunity to convert them into 95-85% put spreads and extend the duration for another 6 months for pretty much no cost. But that opened up the tail risk so I simply bought the one month 70% puts as a just-in-case safety net.

 

[Quant Dracula]

The term you're looking for is "elasticity" or "gearing," although deep OTM options are really a vega play, not a delta play.

https://en.wikipedia.org/wiki/Greeks_(finance)
Lambda

Lambda,

, omega,

, or elasticity [4] is the percentage change in option value per percentage change in the underlying price, a measure of leverage, sometimes called gearing.

Thank you sir, I'll look into lambda further.