How do you estimate future option price?

Quote from donnap:

At the very least, a 5 minute time out would be appropriate. Honestly.:p
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Can I come out of the corner now?

(drumming fingers)
(repeating number sequences)
 
Quote from 1a2b3cppp:

^ 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?
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Yes this is correct. However delta is always changing too. The delta from $40 to $39 won't be the same as the delta from $39 to $38. And other factors will change it too like time left and volatility.
 
Quote from spindr0:

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.
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Oh I see.

My thinking was originally something like this:

You buy a bunch of stock.

It goes up (yay!)

But now you're like "crap, what if price goes down? I don't want to sell yet cuz I'm pretty sure it will continue to go higher in the future, but I don't know if it's going to go higher NOW or if it's going to go down a bit first."

So you buy a (some?) long put(s).

If price continues to go up, who cares, cuz you are still making money on your long position. Disregard put.

If price goes down, the put makes money, and you just use that money to buy more stock (because it's going to eventually go back up again) so the future benefit is more money because you how have a bigger position of stock for when it does eventually go up.

I guess if the stock doesn't go anywhere, then the put expires worthless AND your stock value doesn't increase any. So that would suck.

Am I way off on this idea?
 
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?
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re: "Is there a way to know how much that option would be worth if price dropped to 45? Or 40? Or 38? Etc.?"

Quick and dirty way, just look at the other strikes with the appropriate strike difference. e.g., if you have a $40 put and you want to estimate the effect of a $5 stock price drop look at the current $35 put price to predict the new $40 strike price. For time value impact you could do a similar analysis using shorter dated options if they exist.

Of course, this has limitations and does not consider many variables like IV, etc. But in some circumstances it's useful.

Don
 
Let me see if I have this right.

So I'm looking at April 11 QQQQ options.

QQQQ is currently at $57.17. Let's say I own 100 shares.

Let's say I'm worried that QQQQ is going to drop significantly sometime before April 11, so I buy a put option with a strike price of $53.

So the April 11 $53 put is currently $0.57 which means I would pay $57 for it, right?

Ok, so now let's say it's sometime before April 11 and QQQQ drops to 50 because something crazy happened in the economy or whatever. Alright. So now my 100 shares of QQQQ stock have lost $717. That sucks. BUT I have that long put that is now ITM.

As of right now, I'm trying to estimate how much it would be worth should QQQQ drop to $50.

Looking at current April 11 $50 puts, the price is $0.27. Well that can't be right.

Did you mean look at the other type of options prices for the stirke price? So the current price for a April 11 $50 call is $7.30. Does that mean that my put is possibly going to be worth $730?
 
Quote from 1a2b3cppp:

You buy a bunch of stock. It goes up (yay!)

But now you're like "crap, what if price goes down? I don't want to sell yet cuz I'm pretty sure it will continue to go higher in the future, but I don't know if it's going to go higher NOW or if it's going to go down a bit first."

So you buy a (some?) long put(s). If price continues to go up, who cares, cuz you are still making money on your long position. Disregard put.

If price goes down, the put makes money, and you just use that money to buy more stock (because it's going to eventually go back up again) so the future benefit is more money because you how have a bigger position of stock for when it does eventually go up.

I guess if the stock doesn't go anywhere, then the put expires worthless AND your stock value doesn't increase any. So that would suck. Am I way off on this idea?
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Nothing wrong with your hypotheticals as long as the market cooperates.

Given a comfort with owning stock (being an investor) and hoping/waiting for the stock to "eventually" rise, you might also consider rolling the appreciated put down to a lower strike thereby pulling money out of the option position, reinvesting that in more stock and remaining somewhat put protected in case you're dead wrong on the timing of "eventually".
 
QQQQ is currently $57.17 and you buy the Apr 53p for for 57 cts (45 days until expiration).

QQQQ drops to $50.17 immediately. At that point, the 53 put will be $2.83 ITM

What put is $2.83 ITM today?

Answer: current price + $2.83 or $60 put

Apr 60p is $3.27 bid so your put goes up $2.70

This assumes no time decay or IV change.
--------------------------------------------

Now suppose it takes 28 days for that drop to occur. What option today is $2.83 ITM and has 17 days until expiration? Ummm, maybe the Mar 60p which is trading for $3.03 ? In that case, your put gain would be $2.46 which is less than above because of the time decay.

This assumes that in 28 days the Apr puts will trade at current Mar IV level.

Wouldn't it be a whole lot easier to just plunk a few numbers into a pricing formula so that you could more accurately calculate the put's value at any UL price or point in time ??? :confused: :confused: :D
 
Quote from spindr0:

QQQQ is currently $57.17 and you buy the Apr 53p for for 57 cts (45 days until expiration).

QQQQ drops to $50.17 immediately. At that point, the 53 put will be $2.83 ITM
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I was with you until this point. How do you know it will be $2.83?

Wouldn't it be a whole lot easier to just plunk a few numbers into a pricing formula so that you could more accurately calculate the put's value at any UL price or point in time ??? :confused: :confused: :D
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Yes, that's why I asked for a formula in the first post.

So my estimate of it being $700 was way off it seems.
 
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Quote from spindr0:

QQQQ is currently $57.17 and you buy the Apr 53p for for 57 cts (45 days until expiration).

QQQQ drops to $50.17 immediately. At that point, the 53 put will be $2.83 ITM
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Quote from 1a2b3cppp:

I was with you until this point. How do you know it will be $2.83?

I didn't say that it would be worth $2.83. I said that it would be $2.83 ITM (in-the-money). Do you know what ITM means?


So my estimate of it being $700 was way off it seems.

Given that you took the current price of the Apr $50 call as the future price for the Apr 50p at UL price of 50, I'd say that you were way off in more ways than one. :)

>> Did you mean look at the other type of options prices for the stirke price? So the current price for a April 11 $50 call is $7.30. Does that mean that my put is possibly going to be worth $730? <<
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