Explain this price action?

J

jimmyjazz

Yesterday near the close I bought some OTM calls on SOXL ($136.14 at the time).

Jan192018 $163C $2.84

This was pretty close to the middle of the spread. Delta was ~ 0.2 when I placed the trade.

Today SOXL gapped up and then wound its way down to close ~ $133.75, which was some $2.39 below the underlying when I purchased the calls. I would expect the price change due to delta alone to be some $0.48 (ignoring any drop in delta as the calls went farther OTM), and I would also expect time decay to be about $0.08 (original price divided by roughly 42 days to expiration). So, disregarding volatility effects, I can see my way to these calls dropping from $2.84 to $2.28 or so.

The middle of the bid/ask is currently $1.90, which seems like too big a drop, especially if volatility climbed. (I can't find IV/HV data right at the moment, as I'm trading with a new broker and still trying to find my way around their site.)

Am I missing something? LOL.
 
Your numbers make sense. The closing quote of $1.55 x $2.25 does not so I'd attribute that to:

1) a stale option quote
2) the effect of the spread widening on one or both sides when the market closes
3) an IV drop of .03

I'd lean toward #3. You'll find out Monday morning
 
I didn't feel like the price climbed as much as it should have at the open, either. I attributed that to volatility dropping (i.e., long vega fights long delta as underlying rises and volatility drops). Can the nature of the volatility skew explain both effects?

IV hates me.
 
IV skew applies to the volatility smile across different strikes. You're looking at intraday price change of a single strike so AFAIC, skew has nothing to do with this.
 
There was a thread started a week ago discussing anticipation vs reaction which is pertinent to this thread of "Explain this price action" for stock code SOXL.
https://www.elitetrader.com/et/threads/anticipation-vs-reaction.315575/
I'm not an options guy but placing a call on SOXL was an anticipation trade in my book with a good probability for failure.
If you look at this chart you will see a bit more on why this would also be high risk anticipating a bullish move.
https://www.barchart.com/etfs-funds...=0&sym=SOXL&grid=1&height=500&studyheight=100
Not wishing to say "told you so" after the fact, but going long at this point is a tad premature and trade is best done after a more solid signal rather than jumping in too early.
 
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I'm not at all interested in talking about the reason why I placed the trade. Suffice it to say it's part of my plan, which works well enough to be profitable over the long haul. I didn't anticipate jack. I got my signal and placed the trade. I'll take the trade off when that signal flashes.
 
Single day price action should not matter. This trade had all the ingredients for going LONG. I would stick in there until your system issues a reversal/exit order.
 
spindr0 said:
Your numbers make sense. The closing quote of $1.55 x $2.25 does not so I'd attribute that to:

1) a stale option quote
2) the effect of the spread widening on one or both sides when the market closes
3) an IV drop of .03

I'd lean toward #3. You'll find out Monday morning
More...
also...this is a 3X leveraged position. While theoretically that should have nothing to do with the option pricing, I've found that the options on these these mult-leveraged etfs do some funky things on a weekly close.
 
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