I’ve spent a couple hours looking around for an explanation but for some reason can’t find one that clicks with me. I keep hearing about things like “IV crush” and stuff like that, which apparently are based on the volatility causing the price of the option to change. However, I don’t understand why that would matter if you already bought the option. Obviously I’ve never actually bought any options yet, but the only way I can see this happening is if you somehow pay for the option contract after you buy the contract, which doesn’t make sense to me. From my understanding, when you buy a contract you pay the contract amount and then the date is set for the contract to expire, and all the strike price and contract price are fixed. My question is do you pay the contract price when you exercise the option, or whatever previous time you wanted to buy the option?
For example, say there’s a call option for GOOG with a contract price of $4 and strike price of $150 expiring on 9/6, and for the purposes of this example I intend to exercise it at 12pm on 9/5. If I wanted it, would I pay the $400 for the contract now, or do I have to pay the amount that the contract is worth at 12pm on 9/5?
Posted by Old_Faithlessness509
8 Comments
You pay the premium up front to buy the contract.
To buy the GOOG is currently $158.61 at close. There is no way the option on the $150 strike is less then $8.61.(market makers are not going to sell at an intrinsic loss).
They’re talking about the implied vol of the option going down after you’ve bought it which means the price goes down. You’re right that implied vol is irrelevant if you hold the option to expiry, it’s very relevant if you want to sell the option before that. Look up the Black Sccoles model and Vega. And don’t ever buy an option in real life
Most options traders will close the position rather than exercise. If you bought the option to open, you sell to close. If you sold to open, you buy to close.
If an option is bought for $4, cost basis is $400. IV crush is when the expiration date gets closer, the stock has not moved enough in price, and IV decreases from what it was when you bought it. Your options become sell the contract for much less or let it expire worthless.
If you’re on the other side of the trade and you sold the options to open, IV crush is a good thing as it means the stock is probably not moving enough for you to be assigned.
Same strike price same expiration date contract can be different in premium.
Implied vol is built into the price you pay for that contract.
If you buy the contract during a high vol period, and vol collapses, price of contract goes down.
The greeks are a mathematical formulation for a probability distribution based on 5 inputs.
Say you bet whether rain will fill a cup of water.
During moonsoon season, vol goes up because the range for the amount of rain is alot higher than the dry season.
So lets say you bought a call contract during moonsoon season for water to fill your cup, youd pay more because the probabilty is higher.
You hold that contract into dry season. The price of the contract would drop alot because the range in rain is a lot lower.
Thats basically, implied vol. Instead of rain, implied vol analyzes price movement in the stock (underlying)
What you paid for the contract is connected to your final p&l. Whether or not your contract finishes in the money is not the only relevant consideration in evaluating a trade. If you pay $100 for a contract that finishes $1 in the money, you lost.
Hello OP, I believe this video will help you
Understanding The Options Chain and Greeks
https://youtube.com/live/BZxrGaaFJto?feature=share
An option is simply an asset that gives you the right to purchase or sell another asset on (or sometimes before) a certain date. The price of the option is simply the markets value for the value of that right.
You say you see a 9/16 150 strike GOOG call for $4. In buying that you pay $4 for the right to purchase GOOG at $150 on or before 9/16. Obviously this is only valuable if you’ll be able to sell GOOG for more than $150, otherwise why would you want to pay $150 for GOOG if you can pay less in the market?
As for your question, you pay the price of the option when you buy it. In this case the option is $4 and the multiplier is 100 so you’d pay $400. **If** you decide to exercise it, you’d then pay $150 per share for 100 shares, so you’d pay $15,000.
IV crush is not related to anything I’ve discussed so far. It simply relates to how IV decreases drastically after large events like earnings and Fed meetings. That being said, it doesn’t seem like you totally grasp that options prices are fluid like any market. So if you’re only buying and planning to hold to expiration, then yes IV crush or really any movement in IV doesn’t *really* matter to you because you’re not looking to sell your option. In reality, options prices fluctuate all the time so the $4 GOOG call you buy may be worth $1 later so if you decide you do want to sell it you may have to take a loss.