How can the prices of two deep ITM options of the same underlying, but at different expiration dates, go in different directions on any given day?
How can the prices of two deep ITM options of the same underlying, but at different expiration dates, go in different directions on any given day?
Loading saved threads...
user19035 · External communityPost link
External question — Personal Finance Stack Exchange
Author: user19035
Original post: https://money.stackexchange.com/questions/148396
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
I have sometimes witnessed the price of deep in-the-money option contracts of the same underlying, but different expiration dates, go in different directions by the end of the trading day. This makes no sense to me.
The intrinsic value of both options should be directly correlated to the price of the underlying. For example, in case of put options, if the underlying's price goes up, the intrinsic value of both options should go down in equal amounts.
The extrinsic value should behave similarly. Each day that passes, both options experience time decay, so both option's extrinsic value should go down accordingly (though not necessarily by equal amounts). If the underlying's implied volatility changes, the extrinsic values of both options should move in the same direction as well.
So, how is it possible that one option could end up on any given day with a higher price than the day before, while the other option ends up with a lower price than the day before?
Quote
Report
Bob Baerker · External communityPost link
External answer — Personal Finance Stack Exchange
Author: Bob Baerker
Original post: https://money.stackexchange.com/a/148397
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Illiquid ITM options have wide spreads and can have stale quotes.
Suppose XYZ is $27 and the $25 call is $$2.50 x $3.00. Someone sells at the bid for $2.50 and then with XYZ still at $27, someone buys the call for $3.00. So the option appears to have risen 50 cents when in reality it's just a function of a wide quote.
Meanwhile, another ITM call trades at $2.00 twice in a row and reflects an unchanged status. So one ITM call appears to have risen while the other didn't.
The stale quote scenario would be that when XYZ is $27 (as above), the $25 call trades for $2.50. XYZ rises closes at $29 with no additional trades in the $25 call. The next day, XYZ opens at $29 and the call quote is $4.00 x $4.50. A buy at $4.50 shows a gain of $2.00 yet the stock is unchanged.
One call up and the other one down would just be a variation of the above.
Quote
Report
Post Reply
Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: user19035 Source score (net votes, not local likes): 0 Original post: https://money.stackexchange.com/questions/148396 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I have sometimes witnessed the price of deep in-the-money option contracts of the same underlying, but different expiration dates, go in different directions by the end of the trading day. This makes no sense to me. The intrinsic value of both options should be directly correlated to the price of the underlying. For example, in case of put options, if the underlying's price goes up, the intrinsic value of both options should go down in equal amounts. The extrinsic value should behave similarly. Each day that passes, both options experience time decay, so both option's extrinsic value should go down accordingly (though not necessarily by equal amounts). If the underlying's implied volatility changes, the extrinsic values of both options should move in the same direction as well. So, how is it possible that one option could end up on any given day with a higher price than the day before, while the other option ends up with a lower price than the day before?
Checking account access…