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Weird options scenario

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Deal Addict
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Aug 5, 2011
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Weird options scenario

So I am just a newbie in investing, recently came across that my friend lost quite a lot of money on options. He bought a 325 Put option for NFLX, expiring 25/Jan. With the anticipation that NFLX would fall on earnings, indeed it fell 5% today, but he lost 50%. The purchase price was 6.8$ the day before, it went to 3.2$ after the stock fell, losing half in price. Isn't the Put suppose to make him more money when the price is going down?
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Aug 7, 2007
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https://www.investopedia.com/university ... s-pricing/

If you're a newbie to investing, you need to stay far away from Options. This isn't a "weird options scenario".
His NFLX strike price is $325. NFLX is currently trading at $343. He is NOWHERE near the strike price. That's why the option lost it's value and it's expiring soon.
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Thank you for the response, he bought it the day before when NFLX was at 350 @ 6.8$, today stock fell to 343, the option is now worth 3.2. Expiration is next Friday, plenty of time value remaining. The stock is moving in his direction so he shoudnt be losing money. But he lost 50%. Did the sellers jack up the prices before earnings? $6.8 was among the lowest price yesterday.
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Jun 26, 2005
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It's because of Greeks. There are 5 factors that determine the price of an option. Price of the underlying is just one of them.

One of them is Vega, which is implied volatility. What happened in his case may have been:

Before earnings, the implied volatility is very high (Vega), because people have no idea what the stock price will do after earnings. High Vega means the price of his PUT was very high.

Then, after earnings are announced, the vega will crash down big time, because everyone now knows. So, price of the put option will drop significantly.

So in your friend's NFLX put options, he bought it before earnings = High price. After earnings, Vega crashes = Low price

Now, price of NFLX did drop like you said, so the Put price did go up a little, but the vega drop was so much, it erased all the price drop factor and more from his Put option.

Hence, he basically BOUGHT high and SOLD low. When volatility is high, one should never buy call or put. They should sell calls or put instead.

If he believes NFLX will drop, then he should have SOLD calls. Then the next day, his call options will be worth very little, he will then buy to close the position = profit. But again, the risk is, if NFLX jumped up in price, he would lose $$$

See my rules below.

Tell your friend to learn more about Greeks. And give him these rules, until he becomes a seasoned options trader:

1) never play earnings
2) buy options when IV is low and rising
3) sell options when IV is high and dropping
4) when buying, expiration must be >90 days
5) when selling, expiration must be <30 days
6) always set stop loss orders to exit
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IMWHFMPC wrote: Thank you for the response, he bought it the day before when NFLX was at 350 @ 6.8$, today stock fell to 343, the option is now worth 3.2. Expiration is next Friday, plenty of time value remaining. The stock is moving in his direction so he shoudnt be losing money. But he lost 50%. Did the sellers jack up the prices before earnings? $6.8 was among the lowest price yesterday.
Because the market doesn't think the stock will fall below $325 and there is only one week left so the option is losing value.
Why do you want to climb Mt. Everest, Sir? - Because it is there.

— George Leigh Mallory
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ruchir wrote: Because the market doesn't think the stock will fall below $325 and there is only one week left so the option is losing value.
Its mainly due to volatility crush (see my post for details)

He did the rookie mistake of buying a put when volatility was high. he should have been selling a call.
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IMWHFMPC wrote: Thank you for the response, he bought it the day before when NFLX was at 350 @ 6.8$, today stock fell to 343, the option is now worth 3.2. Expiration is next Friday, plenty of time value remaining. The stock is moving in his direction so he shoudnt be losing money. But he lost 50%. Did the sellers jack up the prices before earnings? $6.8 was among the lowest price yesterday.
And don't let the percentage shock you too much, options are smaller numbers, so the percentage of course will be bigger.

Heck, if you saw my SPY puts thread, I earned over 100% in a few days from puts. Have you ever heard of someone saying their 2018 returns were 100%+ (if they are in stocks or mutual funds) ?
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rfdrfd, you just taught me and my friend something new. He was aware of the vega existence, as well as delta and gamma but obviously he didn't enough knowledge Thank you so much, really an expensive lesson. Was your SPY puts during the huge downtrend in Dec? That's really impressive!
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Apr 21, 2004
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Hopefully it was a small amount.

RFD2 is right. Sometimes better to sell options when implied volatility is through the roof because when that collapses, you get to pocket premiums.

Also if you are selling, be careful about option assignment, once options are in the money, which goes by lottery.
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IMWHFMPC wrote: Thank you for the response, he bought it the day before when NFLX was at 350 @ 6.8$, today stock fell to 343, the option is now worth 3.2. Expiration is next Friday, plenty of time value remaining. The stock is moving in his direction so he shoudnt be losing money. But he lost 50%. Did the sellers jack up the prices before earnings? $6.8 was among the lowest price yesterday.
It was due to IV crush. The market had priced in the implied volatiliy (i.e. expected move) of the option because of an event (their Q4 earnings). Once the earnings occurred and even though it moved in the right direction, it was not as steep as expected and vega dropped off (price has been "crushed") as Rfdrfd has said. And with little news on the horizon until next week, it lost a lot of value.
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IMWHFMPC wrote: rfdrfd, you just taught me and my friend something new. He was aware of the vega existence, as well as delta and gamma but obviously he didn't enough knowledge Thank you so much, really an expensive lesson. Was your SPY puts during the huge downtrend in Dec? That's really impressive!
Glad to hear, and believe me, been there done that!

Yes it was the down turn in December. At one point my puts were making $12,000 USD profit! I have proof, see below screenshot. But alas, I was not smart enough or quick enough to exit then (because I didn't follow one of the rules of setting a target)

but I exited with about $6,300 USD profit from a $4,500 investment. Gave a big boost to my entire year's 2018 return.

Trading has many components, entry, position size and exit. Have to practice each one.


Also tell your friend to keep options size small, like less than 5. As everything is x100 it's very scary when it goes against you. You'd be losing thousands in no time if you buy more than 5 contracts. Been there, done that!
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Jun 27, 2007
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hey OP, welcome to options volatility crush
never, never buy options when volatility is HIGH, as, for example, before earnings release.
first, learn all the strategies available, what is their profit probability, risk, etc - there are just a handful of strategies, quite frankly, so don't be afraid
then determine what direction you want to bet on. in options, you can be directional (long put, call, spreads) or neutral (straddle, strangle, butterfly, iron condor).
the more risk you assume, the more profit you can expect.
in my experience, being directional is almost always a losing proposition. yes, it's possible to create a spread that will have 60% chance of winning, but majority of he time you're 50/50, just like buying/selling stocks. you're either right or right out.
pay attention to neutral strategies because this is where you can make money consistently. Like selling 2 standard deviations strangle - in case of NFLX, that would have been short 250 put and short 450 call in Feb for $500 credit per 1 contract. Chances of NFLX touching 250 or 450 are 15%, so you'r trade could be a winner in 85% time.
It's easy to grin when your ship comes in and you've got the stock market beat.
But the man worthwhile is the man who can smile when his shorts are too tight in the seat 😃
In Fed We Trust - Make ES Limit Down Great Again!
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Jun 27, 2007
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second post: I think the most important one. Trade management - what do you do?
since OP has Jan 25 exp, and NFLX down 4% on very bullish day, I would keep the puts and sit tight. You don't have time, it's true, but NFLX could move in your direction on Tuesday or Wednesday.
If there is a continuation of the move down, cash out, especially if NFLX touches 325 - probability of it happening is 50%.
in other words, wait til Tuesday afternoon and if there is no continuation down, get out for a loss.
good luck
It's easy to grin when your ship comes in and you've got the stock market beat.
But the man worthwhile is the man who can smile when his shorts are too tight in the seat 😃
In Fed We Trust - Make ES Limit Down Great Again!

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