Short term options play

B

BoilerGRAD

I am looking for some advice on how to trade options in a very short term, trying to capitalize on small daily movements in stocks and increase the return by using options. I feel I am missing some basic knowledge about the price movement of options.

Here is an example:
If the stock will move up several percent in a day, then wouldn't the option price move accordingly (delta x price movement). The options are in the money options with less than 30 premium. What has happened is the option price does not move as expected or might even take a loss while the stock price is up from the entry price.

What am I missing here?
 
Quote from BoilerGRAD:



What am I missing here?
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If the stock makes a large enough move, your option will return a nice profit.

But, if the stock moves by a point or two, sometimes the IMPLIED VOLATILITY gets crushed - and that has a large effect on the price of the option (calls more than puts because IV tends to decline on rallies and expand on declines).

If you are not sure how an IV change affects the price of an option, play with an option calculator.

Mark
 
Another way is to use super DIM options (with delta ~80% or more) and in this case, you will be less affected by extrinsic values like implied volatiolity and time decay,..
 
I am in a similiar position with buying calls.

Bought deep ITM options, with little premium.

I had an entry at a given price, and price moved maybe 2% in my favor. My option inititally was up nicely, but as price retraced slightly, my option lost money, even though the price on the stock never went below my entry price.

Delta was close to 1 on everything since i was so ITM.
 
Quote from forrestang:

I am in a similiar position with buying calls.

Bought deep ITM options, with little premium.

I had an entry at a given price, and price moved maybe 2% in my favor. My option inititally was up nicely, but as price retraced slightly, my option lost money, even though the price on the stock never went below my entry price.

Delta was close to 1 on everything since i was so ITM.
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If your delta is closed to 1, it is interesting to know the call price decreased while the stock price increased, as the IV itself shouldn't have much impact in your case, are you refering to the mid price of the bid/ask for the call option ? - Do you mind to share which option you are long ? :confused:
 
Quote from SmithTheTrader:

If your delta is closed to 1, it is interesting to know the call price decreased while the stock price increased, as the IV itself shouldn't have much impact in your case, are you refering to the mid price of the bid/ask for the call option ? - Do you mind to share which option you are long ? :confused:
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No problem.

It was RIMM, back on the 9th, this was only a day trade, and was in SIM account as i wanted to see how the option would move vs. price.

Bought the 25 call, which I believe was two strikes in at the time. There was less than 30% premium on this option.

As my entry price was hit, stock moved about 1.5%, but my ITM option was worth about 10-11% profit.

As price of the stock retraced, not even below my entry yet, I could see the P/L on this position turn negative very fast. So I'm not sure what it was that made the option value deflate so fast?

Is this the proper way to buy calls anticipating small movements in stock price for very short term positions?
 
Quote from forrestang:

Bought the 25 call, which I believe was two strikes in at the time. There was less than 30% premium on this option.

As my entry price was hit, stock moved about 1.5%, but my ITM option was worth about 10-11% profit.

As price of the stock retraced, not even below my entry yet, I could see the P/L on this position turn negative very fast. So I'm not sure what it was that made the option value deflate so fast?
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Here is the number one question to which you must know the answer: How does the broker determine 'profit'?

If they use mid-point of bid/ask that's fine. But if they assume you must sell at the bid price to exit the trade, and use that bid price to determine your P/L, what good is that?

Before you say the position turned negative, you must know what is being measured. Call them and ask.

Second: 30% premium is not immune to the effects of a decrease in implied volatility.

Mark
 
Actually, options expiration week offers some unique opportunities for day trading options. Because gamma is so high, you can buy OTM options very cheap and if the stock moves your way you can make money pretty quickly. If it doesn't move, or moves against you, you're only out your net debit.

Look at some risk graphs for front month options for QQQQ that are 1 or 2 strikes OTM to see what I mean.
 
Quote from dagnyt:

Here is the number one question to which you must know the answer: How does the broker determine 'profit'?

If they use mid-point of bid/ask that's fine. But if they assume you must sell at the bid price to exit the trade, and use that bid price to determine your P/L, what good is that?

Before you say the position turned negative, you must know what is being measured. Call them and ask.

Second: 30% premium is not immune to the effects of a decrease in implied volatility.

Mark
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Thanks Mark.

I have dispatched an email and will report back what they say. I think they calculate based on bid price?

But I thought we would want P/L to be calculated by the bid? Wouldn't that give us a better estimate of what we'd be able to close the position for?

Also, with the amount of premium, can you expound. Are we better off trying to use 30%, or is a lower number even better?

IV should have less effect the lower the number right?
 
If the stock will move up several percent in a day, then wouldn't the option price move accordingly (delta x price movement). The options are in the money options with less than 30 premium. What has happened is the option price does not move as expected or might even take a loss while the stock price is up from the entry price.
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If the underlying moves up but the option doesn't, the IV is contracting and/or you have a large spread and last trade may be confusing you.

If you want to compare IV change, you have to be consistent - compare bid to bid, ask to ask, midpoint to midpoint, whatever. You can't compare an earlier bid to a later ask (and vice versa) and call that IV change.

Any option with time premium will be affected by IV change. The higher the delta, the lower the effect.
 
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