How do you estimate future option price?

[traderlux]

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.

....+....

 

[spindr0]

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?

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?

Very few have responded to the 2nd half of your question.

Put protected stock will lose, period. That position is equivalent to owning a long call and long calls lose as the underlying drops.

The maximum loss will be apporximately the cost of the put plus the distance down to strike. How much less the loss is will depend on how far ITM the UL is, how much time remains until expiration and IV change, if any. Since you have several variables, a pricing model is necessary to get an almost accurate answer. I say almost because future IV is unknown.

You might want to consider other strategies for protecting yourself. The best one is to get out of the way (sell the UL). Alternatively, a collar is one way to reduce the cost of the protection. Over selling calls (or bearish call spreads) above is a better hedge but introduces upside risk. Pick your poison

 

[spindr0]

Quote from ForexForex:

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.

A valid point but a bad example. Hedging with longer term options costs a lot less. IMO, using an option that close to exp is only for someone trading in a similar time frame and adoitly, at that.

 

[spindr0]

Quote from donnap:

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.

Cello, how are you? How's your viola?

(I should be banished to Yahoo for that)

 

[1a2b3cppp]

Quote from spindr0:

Put protected stock will lose, period. That position is equivalent to owning a long call and long calls lose as the underlying drops.

How is that equivalent to owning a long call?

The long call chart looks like this:

_/

Yes, it loses as the underlying drops.

But a long put chart looks like this:

\_

Doesn't it gain as the underlying drops?

You might want to consider other strategies for protecting yourself. The best one is to get out of the way (sell the UL). Alternatively, a collar is one way to reduce the cost of the protection. Over selling calls (or bearish call spreads) above is a better hedge but introduces upside risk. Pick your poison

From looking at the option charts, I don't think I'd ever be interested in selling options. Too much unlimited downside. I know people make a lot of money doing so, but the stock market usually goes against me so if I sold a call the market would probably go straight up the next day.

 

[donnap]

Quote from 1a2b3cppp:

How is that equivalent to owning a long call?

The long call chart looks like this:

_/

Yes, it loses as the underlying drops.

But a long put chart looks like this:

\_

Doesn't it gain as the underlying drops?



From looking at the option charts, I don't think I'd ever be interested in selling options. Too much unlimited downside. I know people make a lot of money doing so, but the stock market usually goes against me so if I sold a call the market would probably go straight up the next day.

"put protected stock" is the position referred to.

 

[donnap]

Quote from spindr0:

Cello, how are you? How's your viola?

(I should be banished to Yahoo for that)

At the very least, a 5 minute time out would be appropriate. Honestly.

 

[Crispy]

Quote from Martinghoul:

Start by reading some basic options textbooks maybe?

Cannot disagree.

If you plan on even looking at options buy a basic book and learn.


You should at least read this - http://www.amazon.com/Options-Strat...=sr_1_7?s=books&ie=UTF8&qid=1298994660&sr=1-7

He breaks it down really in laymans terms.

 

[atticus]

Quote from 1a2b3cppp:

Too much unlimited downside.

Just a smidge too much.

50% of the time it works ALL the time.

 

[spindr0]

Quote from 1a2b3cppp:

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Quote from spindr0:

Put protected stock will lose, period. That position is equivalent to owning a long call and long calls lose as the underlying drops.
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How is that equivalent to owning a long call?

The long call chart looks like this:

_/

Yes, it loses as the underlying drops.

But a long put chart looks like this:

\_

Doesn't it gain as the underlying drops?

--------------------------------------------------------------------------------
You might want to consider other strategies for protecting yourself. The best one is to get out of the way (sell the UL). Alternatively, a collar is one way to reduce the cost of the protection. Over selling calls (or bearish call spreads) above is a better hedge but introduces upside risk. Pick your poison
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From looking at the option charts, I don't think I'd ever be interested in selling options. Too much unlimited downside. I know people make a lot of money doing so, but the stock market usually goes against me so if I sold a call the market would probably go straight up the next day.

Correct, a long put is different than a long call. However, I compared put protected stock with a long call (they're equivalent) which is what you asked about in your original post. Apples and oranges.

I suggested other ways (not necessarily better) ) to reduce the cost of hedging and to reduce the maximum loss should the underlying collapse (what you asked about in your original post). That has nothing to do with selling naked options per se.

You're reading A and replying as if it were B. We can't help you with that. But if it's merely a lack of option knowledge, take Crispy's good intentioned and appropriate advice and read McMillan's book.