Lost (MORE!?!?) in options?

[natedaag]

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

 

[FrankInLa]

Look up the term "no linearity of options". It explains the answer to your question in detail.

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

 

[guru]

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

You didn't specify whether you bought a call or put, so it can be difficult to picture your case. I'm assuming it might've been a call option.

Generally no one uses stops on options, or trades options at market price (as far as I know) specifically because of the example you provided. Most options are very illiquid and have just a few trades per hour or per day, and have very wide bid/ask spreads, which widen even more when the stock price moves. It's not like somebody is waiting to buy your option at a fair price. This means that when you need to sell an option at market price (assuming that was your case) then you'll get the worst price possible. A market maker can set the price as $0.01 bid and $5.00 ask, even temporarily, so when you sell at market price then you may actually get only $0.01 for your option. You were lucky you've got nearly reasonable price for that option.
Trading options usually requires manual review and decision-making, or a fairly smart automated trading system, not just basic stop.

Here is an example of a very wide bid/ask, where an option seems to be worth $1.2, but if you simply place an order to sell it without using the limit price, you'll only get $0.20 for it:

 

[guru]

Look up the term "no linearity of options". It explains the answer to your question in detail.

Have you looked it up? Because such term doesn't exist:

While "nonlinearity of options" has nothing to do with people making basic trades and placing stops or market orders. He is not doing any advanced analysis of underlying/option price correlations, just simply expected to sell his option at somewhat fair price, and mentioned being a noob

 

[trdes]

Have you looked it up? Because such term doesn't exist:

View attachment 224006


While "nonlinearity of options" has nothing to do with people making basic trades and placing stops or market orders. He is not doing any advanced analysis of underlying/option price correlations, just simply expected to sell his option at somewhat fair price, and mentioned being a noob

I think he just meant trading options is not a linear process like buying and selling a stock. Basically like the example you gave, if you press market order for an option it doesn't work that well because it isn't linear like if you press market order on a stock, you'll generally get a very decent fill unless it's a penny stock.

 

[Amahrix]

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

Option prices have many more dimensions that affect its price. It’s not just the underlying. Did u know that

 

[newwurldmn]

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

If you listed the ticker, the exact option you bought and the date you bought and sold the option this question could be answered in 10 seconds.

 

[FrankInLa]

Term exactly explains why a 20% move in a stock does not translate into a linear move of the underlying option.

Have you looked it up? Because such term doesn't exist:

View attachment 224006


While "nonlinearity of options" has nothing to do with people making basic trades and placing stops or market orders. He is not doing any advanced analysis of underlying/option price correlations, just simply expected to sell his option at somewhat fair price, and mentioned being a noob

 

[taowave]

My guess is you had a very wide bid offer spread on the option going in and out and paid dearly.

If the delta on the option was .70,down .60 in the stock would cost you apx 42 cents on the option. So the option "value "went from 4.40 to 4.00 as the stock was down 6 percent." but that doesn't mean the option was 4 bid.The market was probably 3.7 bid at 4.20,and you sold at the market..

What was the bid offer spread when you bought the option??

Did you expect a tighter market when the stock was dropping like a rock an down 6 percent???

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

 

[guru]

Term exactly explains why a 20% move in a stock does not translate into a linear move of the underlying option.

Such term doesn’t exist so it cannot explain anything. A noob who cannot spell also can’t explain anything to another noob.
While you’re reading too much into this. He can worry about linear vs non-linear after he figures out how to sell an option.