Option Pricing between strikes

S

spreadgod

I was wondering if someone could shed some light on the greeks for me.

I understand there's formulas to use to calculate the theoretical price of options like the Black/Scholes formula and there's such thing as selling delta, etc.

Why does a stock priced at 40 (QQQQ) have an offer of $0.45 for the NOV 40 puts and an offer of $1.15 for the NOV 41 puts (A difference of $.30 time value for the options) The same is true on the opposite calls too. (NOV 39 calls at $1.15 and NOV 40 calls at $.45)

Thanks in advance for the education.

EDIT: I show a delta of -77.45 for the 41 and -48.41 for the 40 put strikes
 
Quote from spreadgod:

I was wondering if someone could shed some light on the greeks for me.

I understand there's formulas to use to calculate the theoretical price of options like the Black/Scholes formula and there's such thing as selling delta, etc.

Why does a stock priced at 40 (QQQQ) have an offer of $0.45 for the NOV 40 puts and an offer of $1.15 for the NOV 41 puts (A difference of $.30 time value for the options) The same is true on the opposite calls too. (NOV 39 calls at $1.15 and NOV 40 calls at $.45)

Thanks in advance for the education.

EDIT: I show a delta of -77.45 for the 41 and -48.41 for the 40 put strikes
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Try 21st Century's free Course #201 Mastering Options Trading. I.e. for delta look at http://www.21stcenturyinvestoreducation.com/page/tce/courses/course-201/005/004-moredeltagamma.html, then poke around other subjects. But, you should probably study it systematically from beginning till end.
 
Quote from cnms2:

Try 21st Century's free Course #201 Mastering Options Trading. I.e. for delta look at http://www.21stcenturyinvestoreducation.com/page/tce/courses/course-201/005/004-moredeltagamma.html, then poke around other subjects. But, you should probably study it systematically from beginning till end.
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thanks for the link. i'd like to try and apply common sense to the mathematics. i was just making an observation that all things being the same if a person feels that the stock is going below the current price (40 in this case), why would a person pay .35 for one strike and only .15 (above the intrinsic value) for another strike that has the same amount of gain if the stock moves one cent lower (and the option is held to expiration)?

looking at today's prices, with the stock actually up to $40.15, the 40 put is $.30 ask while the 41 put is only $.90 ask. they need $.45 movement of the stock to breakeven on the 40 put while they only need $.05 drop in the stock for breakeven on the 41 put.

is this what they refer to as selling delta (on the 40 I assume)

i understand there's more at risk by buying the higher strike price since the stock could go above 41.
 
Quote from spreadgod:

thanks for the link. i'd like to try and apply common sense to the mathematics. i was just making an observation that all things being the same if a person feels that the stock is going below the current price (40 in this case), why would a person pay .35 for one strike and only .15 (above the intrinsic value) for another strike that has the same amount of gain if the stock moves one cent lower (and the option is held to expiration)?

looking at today's prices, with the stock actually up to $40.15, the 40 put is $.30 ask while the 41 put is only $.90 ask. they need $.45 movement of the stock to breakeven on the 40 put while they only need $.05 drop in the stock for breakeven on the 41 put.

is this what they refer to as selling delta (on the 40 I assume)
More...
Option prices are determined by the probability of being in the money at expiration. An ITM put has a higher probability to expire ITM than an ATM put. Simplistically, if you multiply the probability for each tick (minimum price increment) with the amount ITM, then integrate them, you'll get a pretty close number to the more accurate one predicted by the Black-Scholes model.

Delta is positive for calls and negative for puts. Selling deltas means selling calls or buying puts. When you sell deltas you adjust your position exposure to the underlying price changes so that your position will go up less (or even go down) when the underlying price goes up.
 
Quote from spreadgod:

I was wondering if someone could shed some light on the greeks for me.

I understand there's formulas to use to calculate the theoretical price of options like the Black/Scholes formula and there's such thing as selling delta, etc.

Why does a stock priced at 40 (QQQQ) have an offer of $0.45 for the NOV 40 puts and an offer of $1.15 for the NOV 41 puts (A difference of $.30 time value for the options) The same is true on the opposite calls too. (NOV 39 calls at $1.15 and NOV 40 calls at $.45)

Thanks in advance for the education.

EDIT: I show a delta of -77.45 for the 41 and -48.41 for the 40 put strikes
More...

Time value is the greatest for ATM options hence the difference between the two.
 
Quote from cnms2:

Option prices are determined by the probability of being in the money at expiration. An ITM put has a higher probability to expire ITM than an ATM put. Simplistically, if you multiply the probability for each tick (minimum price increment) with the amount ITM, then integrate them, you'll get a pretty close number to the more accurate one predicted by the Black-Scholes model.

Delta is positive for calls and negative for puts. Selling deltas means selling calls or buying puts. When you sell deltas you adjust your position exposure to the underlying price changes so that your position will go up less (or even go down) when the underlying price goes up.
More...

ok. i think i got it. when i was looking to sell the puts i was thinking the stock would not be below 40.00 and was trying to figure out where i would get the most money for that probability. the 39s were virtually worthless to sell. i was looking for something that gave enough money but that would drop in value quickest towards the expiration.

now looking at it though, the 41s lost their value quicker than the 40s. i could've bought them back for more of a profit than the 40s already today.
 
Quote from spreadgod:

ok. i think i got it. when i was looking to sell the puts i was thinking the stock would not be below 40.00 and was trying to figure out where i would get the most money for that probability. the 39s were virtually worthless to sell. i was looking for something that gave enough money but that would drop in value quickest towards the expiration.

now looking at it though, the 41s lost their value quicker than the 40s. i could've bought them back for more of a profit than the 40s already today.
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As you know options are both a price directional play and an implied volatility play over a given time frame. The further from the money options have less premium (more intrinsic value) hence they are affected more by the price swings. The nearer the money options have higher premium hence they're affected more substantially by the implied volatility changes.

If you want more of a directional play is better to play ITM or OTM. Also, by spreading you can reduce the effect of the IV, if you want so.
 
Quote from Rearden Metal:

A good, free, no registration tutorial for options newbies:

http://www.888options.com/basics/whatis/default.jsp
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thanks for that link as well. i'd like to think my questions are little more advanced than a newbie's.

maybe this is a more relevant link to the question. http://www.888options.com/advanced/volatility_greeks.jsp

i mean, the basics say that an option has only time value and intrinsic value. obviously this is not the full picture as 2 options that are in the money have 2 different time values. i would think this is more advanced and also how one could get burned even if they're correct on the movement of the stock.

if i buy a nov option today with the stock priced at $40, an at the money option is going to cost me more "time value" than the in the money option that has $1.00 "intrinsic value".

and they're trying to sell all these equations and calculations to explain why. it's almost as if they say, hey, you've already made $1.00, why do you want more?
 
Quote from spreadgod:

thanks for that link as well. i'd like to think my questions are little more advanced than a newbie's.

maybe this is a more relevant link to the question. http://www.888options.com/advanced/volatility_greeks.jsp

i mean, the basics say that an option has only time value and intrinsic value. obviously this is not the full picture as 2 options that are in the money have 2 different time values. i would think this is more advanced and also how one could get burned even if they're correct on the movement of the stock.

if i buy a nov option today with the stock priced at $40, an at the money option is going to cost me more "time value" than the in the money option that has $1.00 "intrinsic value".

and they're trying to sell all these equations and calculations to explain why. it's almost as if they say, hey, you've already made $1.00, why do you want more?
More...
An ATM option has higher premium (extrinsic value) than an ITM option, so you risk less if you're wrong in your price prediction. Also, if implied volatility goes up you make money from it more with ATM option.
 
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