"Out of the Money" Question.

G

Godspeed

Hi Guys,

Perhaps you more experience option traders can help me out with this:

I was paper trading FB before earnings and "bought" a front month option at the money. After earnings report, FB surged 25% (at its peak). When I looked at the option chain, the option I bought at the money had risen 160%, whereas the out of the money options went from 600% to 1000%.

I notice this to be the same for other underlying's options too. Can anyone explain to me what is going on? My assumption that when I buy at the money, I am hoping to make more as the option rises, yet, the out of the money ones generally seem to have more gain.

Your feedback will be much appreciated. Cheers.
 
Quote from Godspeed:
----the option I bought at the money had risen 160%....
----the out of the money options went from 600% to 1000%.
----Can anyone explain to me what is going on?
----My assumption....
More...
1) The at-the-money rises more on an arithmetic basis, not on a percentage basis. :cool:
2) The out-of-the-money options can exhibit super-charged returns when there is a fast move in the underlying. :D
3) The returns on the out-of-the-moneys can be "distorted" by the bid-ask spreads too, especially if the premiums are very "small". :eek:
4) Keep paper-trading until you have a better grasp of things. :)
 
It always the same trade-off. The ATM have a higher Delta thus requires less of a move in the underlying, generally lower risk. The OTM will move more percentage wise if your correct but requires more of a move in the underlying with the lower delta. Higher risk. A higher risk must be justified by a higher potential return or it's not worth making the trade.
 
10 cents moving to $1 is 1000%, $1 moving to $2 is 100%. The percent change is all just relative to the actual $ value moved. Those out of the money options carry a lot more risk of ending up worthless, but when they payout it can be big!

Off topic!
Speaking of cheap options last thursday someone said buy QQQ $67 puts they will take off tomorrow, couldn't find the thread but it was relating to google. Whoever it was, that was an awesome call for sure. off topic!
 
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