factors affecting option pricing
Time, Stock price... and Volatility
Confusion over option prices in the previous posts have been cleared up today using google and TOS thinkback
when trading OTM options, put option premiums get significantly inflated during periods of high volatility, for example, after a 10 to 20 percent fall in stock price. One or two days later the volatility decreases and so does the premium.
HOWEVER, for put options that are ITM, they are less affected by fluctuations in volatility.
a comparison between ITM and OTM BIDU options bought at the same time shows a much greater percentage change in option prices during periods of high volatility for the OTM option as opposed to the ITM option.
Summary: ITM options behave much more like stocks, as opposed to OTM options. For OTM options we must take into account, time decay, stock price and most importantly, Volatility
Confusion over option prices in the previous posts have been cleared up today using google and TOS thinkback
when trading OTM options, put option premiums get significantly inflated during periods of high volatility, for example, after a 10 to 20 percent fall in stock price. One or two days later the volatility decreases and so does the premium.
HOWEVER, for put options that are ITM, they are less affected by fluctuations in volatility.
a comparison between ITM and OTM BIDU options bought at the same time shows a much greater percentage change in option prices during periods of high volatility for the OTM option as opposed to the ITM option.
Summary: ITM options behave much more like stocks, as opposed to OTM options. For OTM options we must take into account, time decay, stock price and most importantly, Volatility