Increased volatility increases option prices. Add to that, market makers will move the bids lower and asked higher on stock options when there are not enough options contracts. That means the market maker is the buyer and seller of most of the open contracts. When trading options, you got to give yourself enough time to get out. Market makers a lot of times will drive the bid prices lower to get your options real cheap. If you can wait, the very next day, that same stock option could be higher, with the market maker now, taking the sell side and jacking up the asked prices.
Isn't volatility low right now? Vix is 18.24 and some of these stock have gone straight up in basically a line for the last three days. So maybe the low volatility is driving then the cost of some option contracts despite the price of the underlying going way up?
But yeah now is a time to buy cheap contracts and flip them when the prices rise. I'm looking at DIA and seems the prices haven't moved alot despite the Dow being up something 1200 or 1300 points in the last three days.
I do not use the vix. Why should I when I am trading individual stocks? A stock that goes up 3 or 4 dollars has increased volatility and increased options prices. The same happens when it drops by large amounts. Low volatility is when the stock is trading within narrow ranges and the bid and asked prices are very close.
I totally agree. So what could explain DIA underlying moving up a ton but certain option prices aren't necessarily moving with it. I'm guessing it's because there are so few buyers in the market right now and market makers can play around with the price depending on which side they are taking as you said earlier.
The less market participants, the greater the control of the market makers because they take both the bid and asked of each option trade. They make more monies the wider the bid and asked spreads. That is how they earn their monies.