Option premium hardly moving with underlying price

G

GotherL

Bought DEC 18 6.50 calls of MACK around 6.20 underlying price with a 1.20 premium. It went to $7 about a few min later and the premium only moved up 25 cents.

That's only like a 20% gain to 10% gain on the underlying stock. (I would've made more if I just bought shares instead.)

Was it due to the expiry being far away still? Someone care to enlighten?
 
GotherL said:
Bought DEC 18 6.50 calls of MACK around 6.20 underlying price with a 1.20 premium. It went to $7 about a few min later and the premium only moved up 25 cents.

That's only like a 20% gain to 10% gain on the underlying stock. (I would've made more if I just bought shares instead.)

Was it due to the expiry being far away still? Someone care to enlighten?
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The delta will tell you approximately how much the option will move relative to the underlying.
Delta of .5 means the option will move 50% as much as the underlying.
Delta of .8 means the option will move 80% as much as the underlying.
 
If you'd buy the calls this morning then you'd pay only $0.25, but you bought them after the stock already made its large move and lost its momentum. OTM Calls are usually priced based on momentum. At some point Calls price-in the momentum which also implies future stock price (options are based on expected future stock price, not current price), so they don't change much in value when the stock price is no longer moving much and the chance of going up decreases.

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guru said:
If you'd buy the calls this morning then you'd pay only $0.25, but you bought them after the stock already made its large move and lost its momentum. OTM Calls are usually priced based on momentum. At some point Calls price-in the momentum which also implies future stock price (options are based on expected future stock price, not current price), so they don't change much in value when the stock price is no longer moving much and the chance of going up decreases.

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So it's a bad idea to buy otm options after they already made a big run? What about buying itm or puts instead? I bought some CATB puts today when it hit around 3.10's. Made about 45% on a 20% drop. Was expecting a lot more.
 
Option pricing has many things built into them and Volatility is one of biggies

I was looking @ some TSLA put options yesterday... the stock was up and the put options were relatively higher.... Today the stock was down and the puts were lower .... GO Figure(vol)

And yes its better to buy ITM/ATM rather than OTM
 
GotherL said:
So it's a bad idea to buy otm options after they already made a big run?
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No one can predict how big a spike will be or how long a run will last, so a "big run" cannot be defined. It may be a good idea to buy OTM or ITM calls when you expect the stock to continue going up over several days.
Puts also reflect the future/expected price of the stock, as options generally reflect the price of the risk/reward and market expectations. If someone believes that calls or puts are cheap then they will buy so many that they will no longer be cheap. While if someone else believes they are expensive then they will sell so many that they will no longer be expensive. So the market dictates the price of those options. You just need to outsmart everyone else, or make lottery-type bets.
But you're doing good by observing the price and how those options behave. Some of those trades may work great, others may not, yet others may be improved. The options on small stocks are quite illiquid and behave in their own ways, but what you saw is quite normal with them. People who predict a move before it happens make most of the money...
 
guru said:
No one can predict how big a spike will be or how long a run will last, so a "big run" cannot be defined. It may be a good idea to buy OTM or ITM calls when you expect the stock to continue going up over several days.
Puts also reflect the future/expected price of the stock, as options generally reflect the price of the risk/reward and market expectations. If someone believes that calls or puts are cheap then they will buy so many that they will no longer be cheap. While if someone else believes they are expensive then they will sell so many that they will no longer be expensive. So the market dictates the price of those options. You just need to outsmart everyone else, or make lottery-type bets.
But you're doing good by observing the price and how those options behave. Some of those trades may work great, others may not, yet others may be improved. The options on small stocks are quite illiquid and behave in their own ways, but what you saw is quite normal with them. People who predict a move before it happens make most of the money...
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Thanks! One of my staff members in my room made an SPI call before the move up last week. Said he banked 7000%. I was like TF how? It only went from $7-$16. I did some DD and it had something to do with Implied Volatility and the fact he bought before the big run even started attracting attention.
 
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guru said:
People who predict a move before it happens make most of the money...
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That's really good to know. I am quite an expert on predicting stocks before the move. But much better at the small-caps. (It's too bad most of them don't come with options.) I just started getting into options about a month ago or less. Got much to learn!
 
GotherL said:
That's really good to know. I am quite an expert on predicting stocks before the move. But much better at the small-caps. (It's too bad most of them don't come with options.) I just started getting into options about a month ago or less. Got much to learn!
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If all this were even remotely true and all you are really doing is a directional bet and you are using options to simply enhance your leverage, then simply look at the synthetic stock structures. This will replicate the stock move more closely and enhance your leverage.
 
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