IV plummeting?

L

loufah

I bought some front-month SPY puts on Monday, and am surprised at how much they're dropping in value even though the market is declining each day. Yesterday morning, when SPY was at 119.27, the June 121 P was 2.45x2.50. Today, at the same point, the put is 2.35x2.40, and at 119.31 the put drops to 2.30x2.40.

A VIX chart confirms this - although SPY is the same point it was Tuesday morning, VIX is down by about .50. What's going on?
 
Just proving that buying options is for suckers. You can't win.


Quote from loufah:

I bought some front-month SPY puts on Monday, and am surprised at how much they're dropping in value even though the market is declining each day. Yesterday morning, when SPY was at 119.27, the June 121 P was 2.45x2.50. Today, at the same point, the put is 2.35x2.40, and at 119.31 the put drops to 2.30x2.40.

A VIX chart confirms this - although SPY is the same point it was Tuesday morning, VIX is down by about .50. What's going on?
More...
 
Quote from loufah:

I bought some front-month SPY puts on Monday, and am surprised at how much they're dropping in value even though the market is declining each day. Yesterday morning, when SPY was at 119.27, the June 121 P was 2.45x2.50. Today, at the same point, the put is 2.35x2.40, and at 119.31 the put drops to 2.30x2.40.

A VIX chart confirms this - although SPY is the same point it was Tuesday morning, VIX is down by about .50. What's going on?
More...

This is very basic Greeks stuff. The theta on the Jun 121 Put is
-0.0247. Meaning it is <b>supposed</b> to lose 2 1/2 cents from today to tommorow, asuming SPY stays in the same place.

(Yes, I know that if it doesn't move at all, IV probably drops and the option declines by more than 2 1/2 cents, but I'm trying to explain this as plainly as possible)
 
That's a good point Rearden.

Loufah,

Why don't you just plug in the values into a pricing model and see how much you lost to IV, time decay and so on.
 
I was real proud of myself yesterday when I caught the pop at the end of the day buying in some of my short calls. I gave it all back today plus a couple of bucks when the stock went down to the level I made the trades, but IV came in.
 
Memorial Day Weekend Decay is already in the options. We used to run 3-5 days ahead in the models to price this week. One could usually get a free look by buying Thursday and Friday options.
 
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