Sometimes new traders jump into the water without knowing the temperature can change rather quickly. Grab a towel, dry off and I’ll explain.
I get this question all the time: “I bought a call option, the stock went higher and my call barely increased in value! Can you explain that to me?” And I say sure and welcome to the world of volatility.
I bought an out of the money bear put spread on Apple in advance of their annual conference. As soon as I achieved my profit target I immediately closed out my trade. When I checked AAPL about an hour later I noticed it had sunk another $2. Well of course I had to check the price of my spread to see how much more opportunity I missed out on. The spread was only worth $.05 more than where I sold it earlier in the morning! The volatility dropped 7%.
You see in life and options things are going to change. Leading up to the conference there were option traders taking their positions. A demand was created for both calls and puts. After the first day of the Apple conference not revealing anything too exciting the demand had waned and the price of the calls and puts followed suit.
So that’s what happened to the price of my options. Are you ready for the changes the options world will throw at you?