Option Price moves against stock price

[tdeel20]

I was practicing on the Investopedia simulator. On January 11, I purchased some Jan25 SPY 257 Put contracts. The SPY almost immediately started to drop in price, however, so did the Put Option. I understand covering the spread, but even with a large drop, the Put contract never went positive. The stock eventually went back up, and of course, the value of the Put continued to go down. Now, the stock's price has returned to about the same point it was at when I purchased the Put (it's still January 11), and I'm still much farther in the red than the Delta suggested I should be.
What causes this? What causes the Put contract price to go the wrong direction if the stock price goes in the direction that should drive the Put price up and the Time value and Volatility haven't changed?

 

[RedDuke]

Simulation and not real account would be a start. Who know what data is being sent to you.

 

[tdeel20]

Thanks for your reply, RedDuke.

It's Investopedia, and the data is very accurate, even though there's about a 3 minute delay. As I look at the Option Chains from today, Calls and Puts on the SPY both lost money.
SPY was up (very slightly) today. I wouldn't have expected much of a move on either, but there were big moves on both. I'm naive enough to not know just how much Theta could affect an option price, but I wouldn't have thought losing one day in a 2 week contract would have this big of a negative impact on Option prices. Unless someone more intelligent with me (which I feel like all of you are) tells me that something else caused this, I'm going to assume it had to do with Friday's Theta being extra heavy because of not being able to trade on a weekend.

 

[guru]

Yes, this happened, I'm posting 2-day chart below.
This is normal after a period of high volatility when puts got so overpriced (since December) that no one wants to buy them for so much money anymore, especially when there is no more big fear in the market and not many people need to buy puts to hedge. Option prices are based on demand for them (which shows as implied volatility), so if nobody wants to buy them, especially when they're already expensive, then the price needs to go down. It's also possible that people are selling lots of puts right now and there are more sellers than buyers. When you add time decay then they can go down quickly.
If those puts were much cheaper (had low IV) then they should be increasing in price, especially if the fear of a crash or pullback would be growing and investors would be rushing to buy them.

 

[tdeel20]

SPY went up .04% today (January 11, 2019)

Here are Call and Put Chains for the SPY Jan25 contracts. Notice how, even though the ETF had a slight gain, both Calls and Puts had pretty significant losses.

 

[tdeel20]

Yes, this happened, I'm posting 2-day chart below.
This is normal after a period of high volatility when puts got so overpriced (since December) that no one wants to buy them for so much money anymore, especially when there is no more big fear in the market and not many people need to buy puts to hedge. Option prices are based on demand for them, so if nobody wants to buy them, especially when they're already expensive, then the price needs to go down. When you add time decay then they can go down quickly.
If those puts were much cheaper then they should be increasing in price, especially if the fear of a crash or pullback would be growing.

View attachment 196734

Thank you very much, Guru! I thought volatility might have something to do with it, also, but it seemed like too big of a coincidence since I had made out pretty good on a trade that I placed at 2:55 yesterday and closed out at about 10 this morning. (Central Time)
I placed another trade at 1:01 pm this afternoon, and should have recognized some profits almost immediately, but they never came. I stuck with it through the afternoon, and now I'm praying for a market crash over the weekend.
Thank goodness it's not real money.
Lesson learned.

 

[tdeel20]

I've gotten some good information, and I really appreciate it.
If anyone has anything else they can share, please do.

I'm here to learn.

Thank you.

 

[nooby_mcnoob]

Two main factors of option pricing are volatility of underlying and time to expiry. So it isn't a linear relationship with the price of the underlying.

 

[traider]

Yes, this happened, I'm posting 2-day chart below.
This is normal after a period of high volatility when puts got so overpriced (since December) that no one wants to buy them for so much money anymore, especially when there is no more big fear in the market and not many people need to buy puts to hedge. Option prices are based on demand for them (which shows as implied volatility), so if nobody wants to buy them, especially when they're already expensive, then the price needs to go down. It's also possible that people are selling lots of puts right now and there are more sellers than buyers. When you add time decay then they can go down quickly.
If those puts were much cheaper (had low IV) then they should be increasing in price, especially if the fear of a crash or pullback would be growing and investors would be rushing to buy them.

View attachment 196734

How do you quantify expensive or cheap? It's only obvious in hindsight. If market really crashed 40% , the puts would have been the deal of a life time.

 

[guru]

How do you quantify expensive or cheap? It's only obvious in hindsight. If market really crashed 40% , the puts would have been the deal of a life time.

Of course it’s in hindsight but we’re not trying to predict anything, only explain the mechanism of IV, what happened and how it happened. Every example, article and book is written “in hindsight” and if you cannot talk about it then nothing would ever be written or discussed. So yes, I’m explaining the mechanism of IV specifically based on “in hindsight”. And yes, the puts could increase in value but I’m explaining why they didn’t. IV crush is normal and happens often, “in hindsight”