i have one question for the options theoreticians here at et about the value of options.

[rtw]

good day to everyone. i have been placing my first trades on options over the last three weeks trying to speculate on the current earnings season. i have run into one recurrent situation that i wasn't expecting and i want to understand if there is any rule about the pricing of options that i had not properly understood previously. the situation i have in mind is the following:


___


1) if one buys any position in options, the price that one can sell those options back to the market for stays very close to what one paid for them for the duration of that day's regular session. it doesn't matter if the strike price is out, at or in the money; the profit - loss calculation always begins from 0 and the movement in the price of the underlying instrument is what will have the biggest influence on the price of the options.


2) however, if one buys any position in options and holds it overnight, the price of the options decreases dramatically from the same session one purchased the options in to the subsequent ones. i would have expected that the price of the options would stay roughly the same for the next sessions, plus or minus the movements in the price of the underlying and a small loss in value due to time decay (theta) but in several cases i have seen the price of the options i am holding drop almost to zero. the price of out of the money options will go almost to zero but even in the money options will open the following sessions with no other value other than intrinsic value.

i purchased calls for several companies before their earnings reports and even when the price of the underlying instruments moved in my favor and my positions went from being out of the money to in the money, i have made negligible profits when i was expecting my positions to be worth roughly the full price i paid for them plus the favorable price action. after fb, msft and akam reported earnings and the price of their shares was bid higher i was expecting to end up with 200 to 300% of the capital i had put at risk but the day after earnings my positions were worth only the updated intrinsic value and i barely made any profits. akam is the worst case as from the session following the earnings report my position has been displayed as a loser even when the underlying had moved 4% in my favor from the point i purchased the options (71.5 to 74.5).


___


¿is it the case that positions in options always lose all their value except for the intrinsic from the session one has purchased them to the posterior ones? ¿or this is just due to elevated implied volatility in anticipation of the earnings reports? i had been thinking one could use options to place swing trades using the signals from 15, 30 and 60 minute bar charts over several trading sessions (similar to what is displayed in the image below) but if options always lose so much value, even when one has been correct in anticipating the movements in price of the underlying instruments then that would just be impossible.





thanks in advance for your assistance, regards.

 

[OptionsOptionsOptions]

1) if one buys any position in options, the price that one can sell those options back to the market for stays very close to what one paid for them for the duration of that day's regular session. it doesn't matter if the strike price is out, at or in the money; the profit - loss calculation always begins from 0 and the movement in the price of the underlying instrument is what will have the biggest influence on the price of the options.

IMO ..... Your biggest hurdle will be the bid/ask spread and commissions.

 

[Robert Morse]

good day to everyone. i have been placing my first trades on options over the last three weeks trying to speculate on the current earnings season. i have run into one recurrent situation that i wasn't expecting and i want to understand if there is any rule about the pricing of options that i had not properly understood previously. the situation i have in mind is the following:


___


1) if one buys any position in options, the price that one can sell those options back to the market for stays very close to what one paid for them for the duration of that day's regular session. it doesn't matter if the strike price is out, at or in the money; the profit - loss calculation always begins from 0 and the movement in the price of the underlying instrument is what will have the biggest influence on the price of the options.


2) however, if one buys any position in options and holds it overnight, the price of the options decreases dramatically from the same session one purchased the options in to the subsequent ones. i would have expected that the price of the options would stay roughly the same for the next sessions, plus or minus the movements in the price of the underlying and a small loss in value due to time decay (theta) but in several cases i have seen the price of the options i am holding drop almost to zero. the price of out of the money options will go almost to zero but even in the money options will open the following sessions with no other value other than intrinsic value.

i purchased calls for several companies before their earnings reports and even when the price of the underlying instruments moved in my favor and my positions went from being out of the money to in the money, i have made negligible profits when i was expecting my positions to be worth roughly the full price i paid for them plus the favorable price action. after fb, msft and akam reported earnings and the price of their shares was bid higher i was expecting to end up with 200 to 300% of the capital i had put at risk but the day after earnings my positions were worth only the updated intrinsic value and i barely made any profits. akam is the worst case as from the session following the earnings report my position has been displayed as a loser even when the underlying had moved 4% in my favor from the point i purchased the options (71.5 to 74.5).


___


¿is it the case that positions in options always lose all their value except for the intrinsic from the session one has purchased them to the posterior ones? ¿or this is just due to elevated implied volatility in anticipation of the earnings reports? i had been thinking one could use options to place swing trades using the signals from 15, 30 and 60 minute bar charts over several trading sessions (similar to what is displayed in the image below) but if options always lose so much value, even when one has been correct in anticipating the movements in price of the underlying instruments then that would just be impossible.





thanks in advance for your assistance, regards.

That was a very long question. The short answer is that option pricing is based on uncertainty. As earnings are coming up option premiums tend to stay high but after the news there is less uncertainty and option premiums collapse. Even with earnings scheduled after the Close or the following morning, there is no guarantee they will not come out before the close. Option prices will then adjust to less certainty.

 

[piezoe]

You may have inadvertently discovered what everyone who sticks with trading long enough eventually discovers on their own, or is told on the first day if they are lucky enough to have an experienced, honest mentor, i.e., the markets are corrupt to the core. It is no different than if you were at a roulette table in Las Vegas --actually Las Vegas is more honest than the markets -- or at a dog track somewhere in the hinterlands. It is corrupt! Once you learn this and absorb it as truth, you will be able to make regular money from the markets. It doesn't matter what market we are referring to. They are ALL corrupt. If you want any proof of the veracity of what I am telling you, just read Bloomberg news for a month and make note of how many headlines have to do with traders, brokers, or investment banks, and even commercial banks, being fined by various regulatory bodies. How many fund managers going to federal prison. How many caught for insider trading. How many caught for price fixing. How many caught for front running, etc., etc., etc. And that is not even mentioning the legal stuff used to fleece the naive. It is a vast sea of corruption. There is no other discipline in the U.S. that even comes close to this level of corruption . Not even Ron Popeil selling a Ronco Rotisserie on late night TV, and throwing in a second one "free" for just shipping and handling; not even Medicine is as corrupt! Happy trading.

 

[JSOP]

1) if one buys any position in options, the price that one can sell those options back to the market for stays very close to what one paid for them for the duration of that day's regular session. it doesn't matter if the strike price is out, at or in the money; the profit - loss calculation always begins from 0 and the movement in the price of the underlying instrument is what will have the biggest influence on the price of the options.

This is only true for the very first day that an option is available that the profit/loss calculation begins from 0. Starting on the 2nd day, theta (time decay) would set in which would automatically starts the profit/loss calculation at -ve given the influence of everything else.

2) however, if one buys any position in options and holds it overnight, the price of the options decreases dramatically from the same session one purchased the options in to the subsequent ones. i would have expected that the price of the options would stay roughly the same for the next sessions, plus or minus the movements in the price of the underlying and a small loss in value due to time decay (theta) but in several cases i have seen the price of the options i am holding drop almost to zero. the price of out of the money options will go almost to zero but even in the money options will open the following sessions with no other value other than intrinsic value.

i purchased calls for several companies before their earnings reports and even when the price of the underlying instruments moved in my favor and my positions went from being out of the money to in the money, i have made negligible profits when i was expecting my positions to be worth roughly the full price i paid for them plus the favorable price action. after fb, msft and akam reported earnings and the price of their shares was bid higher i was expecting to end up with 200 to 300% of the capital i had put at risk but the day after earnings my positions were worth only the updated intrinsic value and i barely made any profits. akam is the worst case as from the session following the earnings report my position has been displayed as a loser even when the underlying had moved 4% in my favor from the point i purchased the options (71.5 to 74.5).

This is what is called the "Volatility Crush" basically reducing the implied volatility of the options to what it is usually like without earnings announcement. What basically gives those options a huge inflated value before the earnings announcement is really the uncertainty over what its underlying's earnings would be like, the "surprise factor" or "hype" if you will. The bigger the price movement reaction is to the earnings a stock has, its implied volatility, the higher the option value would be. From a market point of view, that is how much the sellers of the options would like to be compensated for writing the options because once the value of the stocks go against them, they are gonna be on the hook to deliver/buy the shares. But once the earnings is announced, there is no more surprises, the "surprise factor" is gone. No more hype, nothing to be seen because everything is known. So UNLESS there is a HUGE surprise in the earnings e.g. Amazon declaring bankruptcy when everybody expects it to announce positive earnings, which increases its implied volatility again because it's a new found uncertainty, the option price would revert to its normal price, thus the huge decrease in price that you typically observe in options after earnings. Even if you have predicted correctly the earnings announcement but if it's NOT bigger than what the market anticipated, you would still see a huge decrease in option price after the earnings, i.e. if the market anticipated 10% movement in the underlying after a positive announcement but the underlying for some reason only moved 5% after the expected positive announcement, even though you correctly bought the call before the earnings, you would still lose because the price of the call before the earnings would've been overly inflated due to the "hype" expressed by the implied volatility, but when the underlying didn't move for the expected amount of movement, the option price would still drop.

If you want to do earning plays with options, it is ABSOLUTELY CRUCIAL that you understand this concept of "Volatility Crush" which basically means "no new surprises, no price increase" otherwise you would get cleaned out real quick!

Good luck!

 

[stockmarketbeginner]

That was a very long question. The short answer is that option pricing is based on uncertainty. As earnings are coming up option premiums tend to stay high but after the news there is less uncertainty and option premiums collapse. Even with earnings scheduled after the Close or the following morning, there is no guarantee they will not come out before the close. Option prices will then adjust to less certainty.

That is interesting regarding earnings reports and subsequent less certainty. I didn't know the price of the options would drop regarding that.

 

[Robert Morse]

That is interesting regarding earnings reports and subsequent less certainty. I didn't know the price of the options would drop regarding that.

 

[tommcginnis]

if one buys any position in options, the price that one can sell those options back to the market for stays very close to what one paid for them for the duration of that day's regular session.

No. Option values can be cut in half (or doubled!) in 30 minutes flat.

it doesn't matter if the strike price is out, at or in the money; the profit - loss calculation always begins from 0 and the movement in the price of the underlying instrument is what will have the biggest influence on the price of the options.

No. You can have the market move *towards* short call positions, and have the impact be a decrease in their value, because the vega/volatility loss exceeded the delta/climb.

2) however, if one buys any position in options and holds it overnight, the price of the options decreases dramatically from the same session one purchased the options in to the subsequent ones. i would have expected that the price of the options would stay roughly the same for the next sessions, plus or minus the movements in the price of the underlying and a small loss in value due to time decay (theta)

Nope. The original model (and the standard calc for VIX) contain not just whole days, but hours and minutes (and maybe even seconds -- I don't remember)... So, while options tend to forget that a night has passed into sometimes an *hour* of cash market, well, around that hour in, the theta burn pops big and will not move much until about 15 minutes before close.

[the other stuff]
Yeah, you pretty much got it: the market will price to make money, for somebody.

 

[rtw]

mr. Morse, that's a very nice looking platform, ¿what is its name and how could i get it?

 

[rtw]

well, i will have to place some exploratory swing trades on options outside the feeding frenzy of earnings season to evaluate whether options don't lose that much value and it is an actionable strategy still. i tried to evaluate a number of strategies with experimental trades on simulator on tradestation but their platform doesn't keep a record of simulated trades on options so it was all for naught.

one thing i have learned very convincingly is that if it is so damn hard to profit from very simple directional bets even when one got the direction right, straddles would have been complete losers in all the trades i have made. maybe vertical spreads could be slightly better than just calls and puts, i will have to evaluate that possibility before this earnings season is over.

also, liquidity is crucial. i placed trades on akam and ea and on most regular sessions there are between zero and three trades in the options i have purchased. in comparison, liquidity on the aaafnn (faanng) stocks is impressive, i have had no problem regularly buying at the bid or lower and selling at the ask.


now, i found this very interesting compilation of the potentially most lucrative stocks to bet on through earnings, ¿is there any rule of thumb to determine if any options are priced too cheaply and thus would make for great bets through earnings? ¿how could i tell how big of a movement through earnings has been priced on the options of the stocks in this list?

Bespoke's Most Volatile Stocks On Earnings: April 2018 Edition
https://seekingalpha.com/article/4161974-bespokes-volatile-stocks-earnings-april-2018-edition?page=2

thanks again, regards.