I'm fairly new to options so please bare with me. I'm trying to understand why in some instances, a significant change in underlying stock price didn't reflect in a large change in options price. Example when GME was crashing after the recent meme stock craze wore off, I had purchased some short dated out of the money puts. Next day, GME crashed like 50% but yet my puts were only marginally up. Is this because the IV at the time was insanely high?
If I purchased puts in say Nivida and it crashed 50% tomorrow, I'm sure those puts would be up much more significantly. I'm trying to wrap my head around why that is.
Posted by psycho_psymantics
6 Comments
By your logic, theta affects Delta. Does this make cents?
Time decay and falling IV will adversely affect short-dated purchased options (calls & puts). Delta will change the most when it’s near at-the-money areas. If you buy options, you should be aware of the IV before and afterwards. It’ll be a big indicator of what happened. Same with theta (time decay).
I’m guessing that your purchased for a very high commission, you bought for top ask price, and it’s been multiple days since you opened your contract and it expires soon.
[IV does affect delta](https://quant.stackexchange.com/a/73402/54838), but not like you describe it.
– Graphically, Delta is a linear approximation to the option price function. A graphical explanation and computer code can be found in [this answer](https://quant.stackexchange.com/a/66170/54838).
– mathematically, it’s the slope of the option price function at current spot (a partial derivative in calculus).
This means everything else e
Is held equal. The option price will only change roughly by delta if the underlying were to change say 1% and nothing else changes (so time to expiry, interest rates, dividends and IV are exactly the same).
A very technical explanation of the relationship between IV and delta can be found in [this answer](https://quant.stackexchange.com/a/65960/54838).
Ok so let’s take a normal distribution. Delta is a ruler going from one end to the other at the bottom. It’s always a ruler from 0-1. IV is the width of the normal distribution. As iv increases, so does the width of the normal distribution, and thus the ruler for delta gets stretched. This means the strikes get a different delta based because iv increased.
IV goes into determining the options price. Delta is the first order derivative of the options price.