Why didn't
my option move as much as the underlying stock?
Options will not move as much as their underlying stock unless they are
in-the-money and/or very close to expiration. There are valid mathematical
reasons for this. The amount an option can be expected to move (all other
conditions being equal) given a 1-point move in the underlying stock is called
delta. Delta is derived from the Black-Scholes formula for pricing options and
represents roughly how much the option behaves like the underlying stock. A
delta of .50, for example, means that an option can be expected (all other
things being equal) to move about fifty cents for every $1 move in the
underlying stock. Delta will change with time to expiration as the option
moves more in- or out-of-the-money, and will also be affected by the
volatility of the underlying stock.
When an underling security is up, why do some call options actually fall in
value for the day?
There are 6 inputs that determine an option's value: stock price, strike
price, time to expiration, interest rate, dividend yield and volatility (over
the life of the option). Normally, if the stock price goes up and the other
factors remain the same then a call option also goes higher. So if the call
option has gone down, then one of the other factors must have changed.
The passage of time can certainly push an option's value lower, although
sometimes it can have the opposite effect. A dividend payment will also have
an impact. But the real wild card is volatility. Sometimes, the market will
bid up the volatility in anticipation of a market-moving event such as
earnings release or a major speech by a Very Important Person. After the
event, the volatility often drops sharply, especially if the event failed to
have the expected impact. There is a
calculator on
OIC's web site that is very helpful for making these types of comparisons.
There is also a free, online,
Options Pricing course that you may take.
Why is it that when interest rates rise, option prices also rise? This seems
odd since stock prices drop in this situation.
I believe you are asking why a CALL option price rises when interest rates
rise. That is because options are priced on a risk-neutral basis, i.e. on a
delta-neutral or fully hedged basis. So a long call would be paired with a
short-stock, and a short-stock position generates interest revenue. That makes
the call option worth more. If interest rates go up, the interest revenue from
the short stock position increases, which makes the call worth still more.
Note that for put options it works the opposite way. Dividends also work in
the opposite direction.
A stock's value is equal (theoretically) to the present value of all its
future dividends, so an increase in the interest rate used to discount the
future dividends will reduce the value of the stock. When someone says higher
interest rates make call options worth more, there is an implicit assumption
of ALL OTHER THINGS BEING EQUAL. As a practical matter, all other things are
rarely equal, and the decline in a stock's price due to an interest rate
increase will often overwhelm the effect of the higher interest rate on the
option itself.
What is the correlation between options and the candlesticks? Will it help me
in option trading?
"Candlesticks" is a charting technique used in trying to predict the future
behavior of the market, and as such really doesn't have anything directly to
do with options. However, if the charting technique allows you to successfully
forecast market movement for an underlying, then options could prove to be
very valuable when implementing various strategies. To that extent, we offer a
wonderful educational software program that illustrates over 40 different
option strategies. The Options INVESTigator offers this strategy information
and much more. The Options
Investigator can be ordered
online or
by contacting an Options Industry Services representative at 1-888-OPTIONS
(678-4667), Monday - Friday, 7:30 a.m. - 5:00 p.m. CST.
To view the various components of option pricing, in addition to supply and
demand, visit
Options Pricing section of the OIC.
If you are interested in additional information you might want to take
Advanced Online Options Pricing Class offered at OIC's
Options University.
How does
"Deeply-in-the-money" differ from just "In-the-money"?
When someone refers to a deeply-in-the-money option they are referring to a
call or a put with a delta close to 100 (or -100 for puts). This option moves
very close to a one for one ratio with stock movement up and down, and is
often viewed as the equivalent of long or short stock. If an option has a
delta closer to say 75, (or -75 for a put) that option is also considered
in-the-money. The difference is that although these options will "move" with
stock, they will not move at the same one to one ratio. Instead, if the stock
went up $1.00, we could expect the 75 delta calls to gain $.75. For more for
information on Delta and option pricing, you may want to take the "Options
Pricing" class in the Options University.
An excellent first read on the subject,
this book carefully and completely defines the terminology, explains options
investing step by step, and presents strategies so that it is easy to understand
at each level of risk involved.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
