Not a newbie but still in the learning phase. Need help understanding why option pricing is not reacting to the Greeks like I thought it might. Without criticizing the fact that I'm buying, puts and calls, any thoughts on the following:
Two weeks ago I bought a July 19th $18 T (AT&T) call for $0.27. underlying price for T at time of purchase was $17.05 and it is now $17.25. I know that Greeks change over the course of time, however they have not changed much on this relatively stable stock. Currently D=.29, G=.27, T=.00…, V=.03. IV seems low at 17.1. since the execution date was so far out, theta should not have much of an impact at this point. Given that, I would have expected option price to increase from time of purchase but it just can't seem to get there. I closed out today at $0.22.
On the flip side, 2 weeks ago I bought a June 21 $14. MARA put. It has gone up substantially since I bought it, so I'm looking at a loss. That's not my question. 5-6 days ago. The stock price was $20.67. it is now $17.11. when it was $20 plus, the option premium was $0.58. it is now $0.59. so the underlying asset has decreased in price, which is the put part but the option premium does not seem to be following. Big difference here seems to be that the IV is significantly higher and this is a very volatile stock to begin with., I get that. Delta is -.19 and theta is -02…. I would just have thought that in that short period of time theta would not impact the price as much.
Just looking for any thoughts on these two situations.
Posted by JGM92AG
3 Comments
Seems like you are ignoring or miscalculating Theta and Vega. Bid Ask Spreads matter too.
The AT&T trade for example. Looks like theta is 2 cents per week. 2 cents per week is 8% per week. Not nothing. Your bid ask spread is likely another 8%.
Greeks are calculations and approximations, not set in stone.
I think you’re a victim if some IV crush. Two 2 week ago was before T’s earnings which were on May 2nd. On April 29, the 19 JUL had an IV of 20.19% and a Vega of .03. As you mention, it’s currently about 3 points lower, so 3 * .03 = .09 which you will need to subtract from the price. The Theta is around 0.003, so multiply that by 10 days, and you’ve shaved off another .03. You did gain some Delta, which was around .29. So, if you multiply .29 * .23 (the different in price), you get +0.067. So, to sum up:
* Original price: 0.27
* Subtract Vega: 3 * .03 = .09
* Subtract Theta: 0.0030 * 10 = .03
* Add Delta: .29 * .23 = .0067
* Estimated price: .217, let’s round that to .22
Does that help at all?
MARA is likely similar as they also just had earnings. On April 29, the IV was 112% and today it’s “just” 89%.
Edit: fixed today’s MARA IV.
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