How do you estimate future option price?

1a2b3cppp · Feb 28, 2011

Quote from ForexForex:

What stock do you have in mind? Then we can crunch the numbers.

SPY

ForexForex · Feb 28, 2011

Quote from 1a2b3cppp:

SPY

OK ....... SPY has weekly options and 1 strike OTM are going for $0.51 with 4 days to expiry. Every 100 shares worth of "insurance" is going to cost you about $51.00 weekly.

That's a lot of money.

grg03002 · Feb 28, 2011

open up an account with think or swim and use their software its free, just can't promise the model they use is what you will want to use.

LEAPup · Feb 28, 2011

I couldn't help chime in. Lol

Here's my question: How about a bear put spread on IWM, buying the may (otm) 77 put for around $2.20, and selling the may 76 (otm) put for around $1.84 if anticipating a correction?

Strangler · Feb 28, 2011

Quote from 1a2b3cppp:

Ok say you're looking at buying a put option for your stock with a strike price of $40 and the current cost is $3.00.

So that means if you bought that put option, it would cost you $300 (option price * 100).

Is there a way to know how much that option would be worth if price droped to 45? Or 40? Or 38? Etc.?

In other words, say you're trying to figure out how many options you may need to offset possible losses at certain stock prices, you need to know what the option will be worth when the stock falls to a certain price. How do you do this?

I'll save you some runaround and answer your question in basic terms.

"Is there a way to know how much that option would be worth if price droped to 45? Or 40? Or 38?"

What you are asking is called delta. Delta ranges from 0 to 1. If a stock has a delta of 1, that means if the stock moves up by $1, the option will move up/down by $1. A delta of 1 is rare and only applies to deep in the money options.

In your example your $3 option probably has a delta of 0.5 if it is at the money. So if SPY went from $40 to $39, your put would go up $0.50 to $3.50. However other factors will influence delta (ie time remaining, volatility, etc.) so it is not an exact science.

Many brokers will give you delta information but there's an easier way to get a quick estimation. If you wanna find out what would happen to your 40 put if SPY dropped by $2 tomorrow, just look at the current bid for the 42 put. If you wanna find out what would happen if SPY went up $3 tomorrow, look at the bid on the 37 put.

1a2b3cppp · Feb 28, 2011

^ so delta is the coefficient of how much the price will change relative to one dollar change in the underlying?

Delta of 1 = stock moves by $1, option moves by $1 (so $100)?

Delta of .25 = stock moves by $1, option moves by $0.25 (so $25)?

Is that correct?

donnap · Mar 1, 2011

Quote from 1a2b3cppp:

Is there a way to know how much that option would be worth if price droped to 45? Or 40? Or 38? Etc.?

No, not exactly, unless you can forecast IV, exactly.

I seldom use a calc when I do it's ivolatility.com basic calc.

Change days to expiry, the UL price and viola. You can also change divs, IV and i rate if you wish.

HowardCohodas · Mar 1, 2011

Quote from Martinghoul:

Start by reading some basic options textbooks maybe?

Have we found someone less qualified than I to trade options?

HowardCohodas · Mar 1, 2011

Quote from LEAPup:

I couldn't help chime in. Lol

Here's my question: How about a bear put spread on IWM, buying the may (otm) 77 put for around $2.20, and selling the may 76 (otm) put for around $1.84 if anticipating a correction?

I suck at guessing market direction.

SCI new york · Mar 1, 2011

Quote from Strangler:

I'll save you some runaround and answer your question in basic terms.

"Is there a way to know how much that option would be worth if price droped to 45? Or 40? Or 38?"

What you are asking is called delta. Delta ranges from 0 to 1. If a stock has a delta of 1, that means if the stock moves up by $1, the option will move up/down by $1. A delta of 1 is rare and only applies to deep in the money options.

In your example your $3 option probably has a delta of 0.5 if it is at the money. So if SPY went from $40 to $39, your put would go up $0.50 to $3.50. However other factors will influence delta (ie time remaining, volatility, etc.) so it is not an exact science.

Many brokers will give you delta information but there's an easier way to get a quick estimation. If you wanna find out what would happen to your 40 put if SPY dropped by $2 tomorrow, just look at the current bid for the 42 put. If you wanna find out what would happen if SPY went up $3 tomorrow, look at the bid on the 37 put.

That's not entirely true given the fact that delta varies in relation to the underlying, vol, and the other greeks. its not as simple as just a delta read, but thats better than just making a guess!