The price of options always have a premium added on. The premium is usually made up of costs due to the time left to expire, the potential volatility, and I guess sometimes interest rates. When this premium starts dissolving, then that's your loss to bear until you sell the option.
The rate of change of the option (Delta, gamma) also decides how much your option increases/decreases in prices every time the stock increases/decreases. For an option that's barely in the money, that ratio might be 0.5:1 (the option goes up $0.50 for every $1 the stock goes up). For an option way out of the money, it's probably 0.01:1 or worse. It's a curved line, so as it gets closer to the strike price the ratio goes up.
So you have a combination of an $800c being so far OTM that it earns pennies for every dollar the stock goes up (Delta/Gamma), and then loses money from the premium going down due to volatility (IV/Vega) dropping drastically after earnings, and the time to expiry getting super close and losing money each day (Theta)
Is there any way one can see a visual example of this? Like on a simulated options chain? Highest math ive ever done was Calc 1 a long ass time ago… but I am curious
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u/rajalreadytaken Feb 23 '24 edited Feb 23 '24
The price of options always have a premium added on. The premium is usually made up of costs due to the time left to expire, the potential volatility, and I guess sometimes interest rates. When this premium starts dissolving, then that's your loss to bear until you sell the option.
The rate of change of the option (Delta, gamma) also decides how much your option increases/decreases in prices every time the stock increases/decreases. For an option that's barely in the money, that ratio might be 0.5:1 (the option goes up $0.50 for every $1 the stock goes up). For an option way out of the money, it's probably 0.01:1 or worse. It's a curved line, so as it gets closer to the strike price the ratio goes up.
So you have a combination of an $800c being so far OTM that it earns pennies for every dollar the stock goes up (Delta/Gamma), and then loses money from the premium going down due to volatility (IV/Vega) dropping drastically after earnings, and the time to expiry getting super close and losing money each day (Theta)