I have been for the last few months, trying to wrap my head around, and understand all the Fundamentals and inticate details regarding Options.
I'm certainly getting there, but there are still questions that come up.
The latest question I have, is " How it works / looks " when the Stock you bought the Option on, goes against you?
Say you're Long at $37.53 ( The price that the stock was, when you bought the Option ) and you bought the $37 Call for .75 cents , with a Delta of .62
So, if the stock goes against you, and drops to $36.53 ..... What would the Option be worth at this point & what would the Delta now be ?
Thanks much everyone for weighing in and helping me out - Michael
Last edited by mdsvtr; March 18th, 2014 at 01:12 PM.
There is no way to know exactly what value the option will have as the market moves because that value depends on time left and, more importantly, volatility. You can however get a very reliable indication using option analysis software which will give you both an expected value and Delta. Do an internet search for option analysis software. There are lots of free programs out there that will do what you want and if you get serious about option trading there are paid programs or broker software such as ThinkorSwim.
By the way you ask, you seem to be quit new to options. Never mind.
TOS should give you an answer to what you ask for, as all the option greeks are there. You even have a standard option strategy analyzing software included in the platform, so test this out or let you be told what is possible on this option trading platform.
Other wise use a simple option price calculator to have a certain idea about the fair value of your option on the level you want to sell it or make your hedge. If your share drops one Dollar like in your example, there should be no point to panic about the volatility. Your concern should be more concentrated into the direction to get out with a fair price of your option, as when market really drops, MIV of options rises and if you sell with " Market order", you most likely will have a bad filled.
There are a few ways to trade options in loss. Best you have a mentor which is teaching you those techniques. Beside a mentor I strongly would suggest to read the following bocks: Trading options visually by Paul Forchione and The option traders handbook (Strategies and adjustments) by George Jabbour and Philip Budwick. Both books really will expand your option trading horizon and bring you to other levels. Those books are not written in a complicated way. This at least I thought when reading them after the book from Mc. Millan about options (Mc. Millan on Options/Second edition). Good luck.
Last edited by Stan Dan; April 5th, 2014 at 03:47 AM.
One simple way to estimate this type of move is just by looking at the option chain itself. In your example, since you want to know what happens if the price of the underyling drops by $1, look at the option strike +$1, or the $38 Call and that will give you an estimate of where the price/delta of the $37 Call will be should the price of the stock go down by $1.
The following user says Thank You to rrvb for this post:
It is true, you can not exactly determine price, but you will get a very good idea how the position behaves when plotting the P&L graph for a position. I still use hoadley-Tool, which is free in its basic version. I have been trading options for 2 years and it still fits my needs.
Looking back, nothing can replace the real trading experience with options, but studying the P&L is very useful.
I am not allowed to post urls, it is called "Options Strategy Evaluation Tool" (OSET)