Options Price mystery (?)

M

mayorq

hey folks,

i recently started day trading using options. i'm with optionshouse. here is the mystery: today, i bought $27 strike price, Jun expiry, put options on ORCL for $.73 (bid was $.72 / ask was $.73) at 06:55am PST. At the time, ORCL stock price was $26.70.

Fast forward to closing time, where ORCL closed @ $26.70, but--here's the mystery part--the bid was $.69 / ask $.71!

What gives?! Why is the bid $0.03 less, when the stock price is the same? I've experienced the same with other stocks as well. ORCL is a very liquid stock, so I don't think it has to do with liquidity.

Much appreciated for an answer that even I can understand :) Thank you!
 
Quote from mayorq:

hey folks,

i recently started day trading using options. i'm with optionshouse. here is the mystery: today, i bought $27 strike price, Jun expiry, put options on ORCL for $.73 (bid was $.72 / ask was $.73) at 06:55am PST. At the time, ORCL stock price was $26.70.

Fast forward to closing time, where ORCL closed @ $26.70, but--here's the mystery part--the bid was $.69 / ask $.71!

What gives?! Why is the bid $0.03 less, when the stock price is the same? I've experienced the same with other stocks as well. ORCL is a very liquid stock, so I don't think it has to do with liquidity.

Much appreciated for an answer that even I can understand :) Thank you!
More...

No mystery .... just time decay.


:)
 
Quote from diaoptions:

No mystery .... just time decay.


:)
More...

Hey diaoptions,

interesting...i had a hunch it was theta, but i figured that the time decay reflects at the opening of the market. in other words, i didn't realize that the decay was continous throughout the day

follow up question: to minimize the time decay, is it better to buy option with decent time left?

For example, buying options that have at least 30 days left vs buying the weekly. my thinking is that since time decay is rapid on options that are closer to expiration then the ones that have plenty of time left, this would minimize the time decay for day trading.

Much appreciate your feedback
 
Quote from mayorq:

Hey diaoptions,

interesting...i had a hunch it was theta, but i figured that the time decay reflects at the opening of the market. in other words, i didn't realize that the decay was continous throughout the day

follow up question: to minimize the time decay, is it better to buy option with decent time left?

For example, buying options that have at least 30 days left vs buying the weekly. my thinking is that since time decay is rapid on options that are closer to expiration then the ones that have plenty of time left, this would minimize the time decay for day trading.

Much appreciate your feedback
More...

Buy in the money, sell out of the money, if you're doing weekly and you're betting on direction. If it goes your way, weeklies are pretty nice. Volatility doesn't count for much on weeklies because they expire within days. Gamma and theta are the big things with them. You get exposure to gamma by buying in the money but not too far away from the price of the underlying. You get positive exposure to theta by selling out of the money but once again not too far from the underlying price. The trick to understanding this is that both gamma and theta peak when you are at the money, and decline the further you get from the underlying's price.
The question you have to ask is: what's your time horizon? If it's days, use weeklies. Longer than that, use the appropriate options series.
 
This is why the pro's sell options, and the public buys options. So simple.

Another reason to trade equities, not the options. Think about it.

Don
 
Quote from mayorq:

Hey diaoptions,

interesting...i had a hunch it was theta, but i figured that the time decay reflects at the opening of the market. in other words, i didn't realize that the decay was continous throughout the day

follow up question: to minimize the time decay, is it better to buy option with decent time left?

For example, buying options that have at least 30 days left vs buying the weekly. my thinking is that since time decay is rapid on options that are closer to expiration then the ones that have plenty of time left, this would minimize the time decay for day trading.

Much appreciate your feedback
More...

Ha, maybe it is a better idea, pnl wise, to read a book on options first. If there was no time decay throughout the day then there would be a massive edge....free gamma. Anyway same story with more time to expiration lower theta, lower gamma. And these are only some of the basics.

Options are not your typical day trading product. The slippage is generaly too high and the fees as well. The high amount of leverage attract a lot of people but it cause for high vola in your pnl which many people don't take into account.
 
Quote from mayorq:

Hey diaoptions,

follow up question: to minimize the time decay, is it better to buy option with decent time left?

More...

Yes, but then you get less exposure to gamma and thus underlying movement, which I assume is what you're trying to profit of.
 
Quote from mayorq:

hey folks,

i recently started day trading using options. i'm with optionshouse. here is the mystery: today, i bought $27 strike price, Jun expiry, put options on ORCL for $.73 (bid was $.72 / ask was $.73) at 06:55am PST. At the time, ORCL stock price was $26.70.

Fast forward to closing time, where ORCL closed @ $26.70, but--here's the mystery part--the bid was $.69 / ask $.71!

What gives?! Why is the bid $0.03 less, when the stock price is the same? I've experienced the same with other stocks as well. ORCL is a very liquid stock, so I don't think it has to do with liquidity.

Much appreciated for an answer that even I can understand :) Thank you!
More...

Market makers don't throw a switch at the end of the day to pull the theta out of the position. They pull it out throughout the day and they will also widen the bid ask spreads. That is why people that sell on Friday afternoon thinking they will get two days of free money, are suprised when they come in Monday morning and their sold option is worth the same if not more. Also keep in mind there are a lot of other factors that change the price of the option which is why you really need to study the greeks before you put on a position. In my experience day trading options is one of the tougher games out there, unless you have a directional bet that can overcome all the things going against you.
 
this has probably been asked, but...
do options decay [theta] over the Weekend,
all the other greeks remaining the same?

and maybe it's not that important,
but if you are selling theta,
20 trading days "sounds" better than 28 days,
to expiration, with 4 weeks to go

thanks
marc
 
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