Louis:
The option value at any point in time also has a lot to do with Vega (Volatility)
When you do your risk/reward analysis you need to include a what if.. what if Volatility goes up or down? How will that affect your option values. Vol crush, especially on the put side in this kind of market can suck out a lot of what you thought would be profit as your expected delta doesn’t materialize because of the Vol crush.
Ken
From: ConservativeOptionS
Sent: Monday, June 14, 2010 9:11 PM
To: ConservativeOptionS
Subject: [ConservativeOption
My basic plan was to buy and sell options only. However, the Greeks have such a strong effect that it may be better to exercise a winning option and take profits that way.
For instance, I have a strangle on BP (long call @37; long put @34)which I purchased on 6/9 for $2.18.
The stock today fell to 30.67, so if I exercised the put and resold the stock I'd have a profit of $307 less 218, net of about $89. The 34 put on the other hand is being bid at 3.65 and the 37 call at.07 which would net $154, so that decision would appear to be pretty straightforward.
But I haven't been watching the day to day changes in option values and something is not adding up for me.
I bought the put @ 1.43 when BP was at $34+, so the stock has fallen about $4.00 while the put has increased only 2.22. I don't think the time decay and bid/ask spread would explain the difference. Putting together the fact that overall the option sale would be better at this moment, but nevertheless overall the put moved considerably less than the stock, something seems out of synch so that at some point between now and june 9th it may have been better to exercise the put.
Either I am missing something very obvious or over analyzing, or there are points at which one method is better than the other.
Any ideas?
Lou
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