August 16, 2025 • 21 mins
"Why did my option lose value even though the stock moved in my favor?" It's a frustrating but common question we're answering today. In this episode of the Options Trading Podcast, we're diving deep into the hidden gears of options pricing to reveal the reasons behind this maddening phenomenon.
We cover crucial concepts like Theta decay, implied volatility (IV) crush, and the combined effect of the Greeks. We'll help you understand why just being right about a stock's direction isn't enough and how to make more strategic, informed trades.
Have you ever had a trade go against you even though the stock moved your way? Tell us your story and be sure to subscribe to the Options Trading Podcast for more conservative options trading insights!
Key Takeaways
- Time Decay (Theta): An option's value shrinks as it gets closer to expiration. This decay accelerates in the final weeks, and it can outweigh any gains from a favorable stock move.
- Implied Volatility (IV) Crush (Vega): Options become more expensive when the market expects big price swings. After a major event like an earnings report, this uncertainty disappears, causing a "volatility crush" that can make your option lose value, even if the stock moves in your favor.
- The Move Wasn't Big Enough: An option's price must rise above its breakeven point to be profitable. If the stock's move isn't large enough to overcome the initial premium paid and factors like time decay, the option can still expire worthless.
- Low Delta Options: Options far out-of-the-money (OTM) have a low Delta, meaning their price barely reacts to a small stock move. They require a huge, explosive move to become profitable.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Okay, let's dive right in.
So picture this you totallynailed the stock direction,
Bought a call, stock went up, sowhere's the profit?
Right, or maybe you grabbed a,put the stock tank.
You're feeling pretty good,Except well, your option's just
not playing ball.
It's frustrating, isn't it?
Speaker 3 (00:33):
Oh, definitely, and you know, it's amazing how
common that feeling is.
That wait, I got the main idearight.
Why isn't this trade working?
Speaker 2 (00:41):
Exactly.
It really makes you questionwhat's actually moving these
option prices Totally so.
Today we're really digging intowhy your option can be so
stubborn, even when the stockdoes exactly what you thought it
would.
We've got some great materialhere that gets right to the
heart of these well, sometimesmaddening parts of option
pricing.
Think of this as, like yourbackstage pass.
(01:04):
We want to understand thehidden gears turning behind the
scenes so you can trade smarterand hopefully have fewer of
those head scratching moments.
Speaker 3 (01:11):
Yeah, the goal really is to equip you with that
deeper knowledge to see pastjust the stock price.
Speaker 2 (01:16):
Because options aren't just simple up or down
bets, are they?
Speaker 3 (01:20):
Not at all.
If you sort of step back, yousee there are these complex
things.
Really they have their ownrules, their own sensitivities.
You really have to payattention.
Speaker 2 (01:28):
All right, so let's tackle the first big reason.
Our sources point to time decay.
You know theta.
What is this really, and whydoes it feel like it's always
working against option buyers?
Speaker 3 (01:38):
Well, think of time, decay theta like evaporation, or
maybe a melting ice cube.
As that option gets closer andcloser to its expiration date,
its value just kind of shrinks,simply because there's less time
left for the big move you'rehoping for to actually happen.
It's like buying fruit it'sperishable.
(01:59):
Its value goes down as it getscloser to expiring, even if the
price of, say, the underlyingstock stays exactly the same.
Speaker 2 (02:06):
That makes sense.
So even if the stock price isjust treading water, if that
expiration date is looming, thatclock is just ticking away,
eating at my options value.
Speaker 3 (02:15):
Precisely.
Speaker 2 (02:15):
Our sources give this example right Buying a call
only five days left, stock goesup maybe two bucks.
Feels good.
Speaker 3 (02:21):
Yeah, seems like a win.
Speaker 2 (02:22):
But the option still loses money because of that time
running out.
Speaker 3 (02:26):
Exactly, and the really key thing to grasp here
is that this erosion, this decay, it actually speeds up the
closer you get to expirationRight.
Those really short term options, the weeklies or ones with just
a few days left, they feel thismuch, much faster.
Even a day or two can make ahuge difference to their price.
You know, a deeper thoughtmight be trying to structure
(02:50):
trades, maybe after volatilityhas been low for a bit, or maybe
theta isn't the biggest forcecompared to a potential move.
Speaker 2 (02:54):
That's interesting, so okay for us listening, trying
to learn from this.
What's the practical advice ontime decay?
Speaker 3 (03:01):
Well, the material we really suggest giving your
trades enough time, don't rushthem.
Maybe aim for options with, say, 30 to 60 days left Gives you a
bit of a buffer against thatconstant ticking clock.
But if you do go for thoseshorter ones, just understand
the stock needs to movedecisively and fast.
Got it?
Makes sense.
Speaker 2 (03:21):
Okay, reason number two for why our seemingly
winning stock bet might turninto a losing option trade a
drop in implied volatility, vega.
Now this one feels a bit moreabstract.
Speaker 3 (03:34):
Yeah, it can be.
Speaker 2 (03:35):
Can you break down implied volatility IV and how a
drop in it can hurt, even if thestock does what I wanted, sure.
Speaker 3 (03:42):
So implied volatility or IV.
It's basically the market'scollective expectation.
It's a guess about how much astock's price is likely to swing
around in the future.
Speaker 2 (03:50):
Okay, the market's prediction of movement.
Speaker 3 (03:52):
Right, and if the market expects big swings,
higher volatility, then optionprices go up because there's a
sort of perceived higher chancethe option could end up making
money.
Speaker 2 (04:01):
Makes sense, Higher chance of a big move higher
premium Exactly.
Speaker 3 (04:10):
But here's the thing those expectations can change
sometimes really fast,especially around big events
like earnings reports.
Speaker 2 (04:13):
Ah, the famous volatility crush.
Speaker 3 (04:14):
That's the one.
Speaker 2 (04:14):
Our sources talk about this how EV often balloons
before these big announcementsand then just collapses
afterward, almost no matter ifthe news was good or bad for the
stock price itself.
Speaker 3 (04:24):
Precisely so you might buy a call before earnings
.
Right, You're expecting a jump.
The company reports greatnumbers.
The stock does go up Should begood news for your call.
You'd think so.
But if that implied, volatilityjust tanks after the
announcement because, well, theuncertainty is gone.
Now the value of your optioncan actually drop.
Speaker 2 (04:45):
Wow.
Speaker 3 (04:46):
Yeah, it can completely offset the gains you
got from the stock moving up.
Speaker 2 (04:50):
So the market already baked in the possibility of a
big move, and once thatpossibility either doesn't
happen dramatically enough orjust the uncertainty is resolved
, that extra premium justevaporates.
Speaker 3 (05:02):
Oof Gone.
Speaker 2 (05:03):
Okay, that's a tough one.
So what can you do?
How do you protect yourselffrom that IV crush?
Speaker 3 (05:09):
Well, the main insight here is probably caution
.
Be careful buying options rightbefore those big known events,
unless you have really strongconviction, the stock is going
to move way more than themarkets already expect.
Speaker 2 (05:19):
Right more than the implied move.
Speaker 3 (05:21):
Exactly, and the material also flips it around.
Suggests maybe thinking aboutselling options when IV is super
high, that you'd actuallybenefit from that volatility
coming back down.
Speaker 2 (05:30):
Huh, that's a different way to play it
entirely.
Okay, interesting, let's moveon.
Reason three the move justwasn't big enough.
The stock moved your way, butit was too small.
Seems simple, but there's moreto it than just the dollar
amount.
Speaker 3 (05:44):
Absolutely See.
An options price has, well, twomain components.
There's intrinsic value andextrinsic value.
Intrinsic value is the sort ofreal tangible in the money
amount.
For a call, it's how much thestock price is above the strike
price.
For a put, it's the other wayaround.
Speaker 2 (05:59):
Got it, the actual profit baked in right now.
Speaker 3 (06:02):
Pretty much Extrinsic value is everything else.
Mostly it's about the time leftuntil expiration, and that
implied volatility we justtalked about Right.
So if the stock moves your way,but not enough to get your
option deep in the money, ormaybe it just barely gets in the
money, that gain in intrinsicvalue might get totally canceled
out by the extrinsic value justmelting away.
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Speaker 2 (07:12):
And this is where the break-even point becomes so
critical, isn't it?
Our sources really hammer thisDefinitely For a call, it's your
strike price plus what you paidfor the option the premium.
If the stock doesn't get abovethat level, you're still losing
money.
The example they use buying$100 strike call for $3, the
stock starts at $98, goes up to$101.
(07:33):
You were right, it went up.
Speaker 3 (07:35):
Yeah, directionally correct.
Speaker 2 (07:36):
But your break even is $103.
So $101 isn't good enough,still down money.
Speaker 3 (07:41):
Exactly so.
Even though the stock moved up,the option was out of the money
for a lot of its life.
Maybe just briefly touchedbeing in the money, but by then
time decay and maybe lowervolatility have already chipped
away at any potential profit.
Speaker 2 (07:55):
So the big lesson know your break-even price, like
really know it, before youtrade.
Speaker 3 (08:02):
Absolutely critical.
Speaker 2 (08:03):
And our sources suggest maybe for smaller moves.
Look at in the money option.
Speaker 3 (08:07):
That's a good point.
They make, yeah, itm options.
They cost more upfront, sure,but they already have intrinsic
value, so they tend to be a bitless sensitive to that extrinsic
value just evaporating becauseof time or volatility shifts.
Speaker 2 (08:19):
Okay, that makes sense.
Let's hit reason number four.
The option was just too far outof the money.
We're talking deep OTM.
These are the cheap ones, right?
The lottery tickets.
Speaker 3 (08:29):
Often, yeah, they look tempting because the price
is low.
Speaker 2 (08:31):
So what's the problem if the stock makes a small move
?
My way.
Speaker 3 (08:36):
Well, these out-of-the-money or OTM options.
They start with zero intrinsicvalue, None.
Speaker 2 (08:42):
Right, because the stock isn't there yet.
Speaker 3 (08:43):
Exactly.
Their entire price is basedpurely on the possibility, the
hope that the stock will make areally big move before the
option expires.
Speaker 2 (08:52):
So they need a home run.
Speaker 3 (08:53):
Pretty much.
They need a significant, oftenfast, price surge to even start
looking profitable.
A small move, a gradual climbin the right direction.
Usually that's just not enoughto overcome being so far away
from the money initially.
Plus, they get hit hard by timedecay and volatility changes
too.
Speaker 2 (09:10):
The example used is buying a $120 call when the
stock's at $110.
Then the stock climbs to $113.
$3 move up.
That's positive.
Sounds okay on the surface.
Speaker 3 (09:21):
But the option is still $7 away from being in the
money.
Speaker 2 (09:24):
Exactly.
The chance of that optionactually gaining much value from
just a $3 stock move is reallylow.
It might not go up in price atall, or it could even go down.
Yeah, the sources point thatout.
It could actually decreasebecause time value is still
ticking away.
Or maybe IV dropped a bit.
Speaker 3 (09:38):
Wow.
So those cheap deep OTM optionsreally are high stakes gambles,
Very much so.
The advice seems to be avoidthem unless you really are
treating it like a lotteryticket expecting a massive move.
Otherwise, maybe look atoptions closer to the money,
slightly OTM, or even at themoney for more moderate
(09:59):
expectations.
Speaker 2 (10:00):
That's the key takeaway.
You need to align the strikeprice you choose with how big a
move you realistically think thestock will make.
Speaker 3 (10:06):
Okay, reason five is one of those do all moments.
Yeah, the stock moved, butafter your option expired, we've
all been there Timing justslightly.
Speaker 2 (10:14):
Oh yeah, that one stings.
Options have a shelf life right, a very specific expiration
date.
Speaker 3 (10:19):
If the move you predicted happens the day after
it expires, well too bad.
The option's worthless.
It doesn't matter how right youwere about the direction.
Eventually it's all abouttiming.
Speaker 2 (10:29):
The example in the material having a weekly put
expires Friday, then Mondaymorning bam the stock tanks.
Speaker 3 (10:36):
Yeah, that perfectly captures that missed opportunity
feeling.
Speaker 2 (10:40):
It really highlights how crucial it is to give your
trade enough time, doesn't it?
Speaker 3 (10:44):
Absolutely Short term options.
They offer more leverage, whichis tempting, but, man, they
demand precision timing.
So, unless you're scalping ortrading a specific event with a
known deadline, yeah, unlessyou're doing something very
specific and short term, it'sgenerally smarter to choose
options with at least a fewweeks, maybe even a month or two
, until expiration.
Speaker 2 (11:04):
Gives your idea some breathing room.
Speaker 3 (11:05):
Exactly A buffer for your thesis to actually play out
.
Speaker 2 (11:08):
Lesson learned Give it time.
Okay, Now let's get intosomething a bit more subtle.
Maybe Poor fill or wide bid-askspreads.
Reason number six what's goingon here?
Speaker 3 (11:18):
So for options that don't trade a lot, they're
illiquid.
Speaker 2 (11:21):
Yeah.
Speaker 3 (11:22):
There can be a pretty big gap between the highest
price someone is willing to paythat's the bid Right and the
lowest price someone is willingto sell it for the ask.
That gap is the bid ask spread.
Okay Now, if you just hit buymarket, you usually pay the
higher ask price and when yousell you usually get the lower
bid price.
So a widespread means you'restarting off at a disadvantage
(11:44):
right away.
It costs you money just to getin or out.
Speaker 2 (11:47):
Ah.
So even if the stock moves myway and my option should be
worth more, if the specificoption I'm holding is really
illiquid with a wide spread, theprice I can actually sell it
for the bid might not havecaught up enough.
Speaker 3 (12:01):
Exactly.
Speaker 2 (12:01):
Or it might not even cover that initial spread cost.
The example they gave buy at$1.50, but the market was $1.20,
bid $1.80, ask.
That's a huge spread.
Speaker 3 (12:11):
Yeah, 60 cents.
Speaker 2 (12:12):
Then the stock moves well, but the bid only goes up
to $1.25.
You're still way down becauseof that spread friction.
Speaker 3 (12:23):
Precisely Low liquidity is the culprit.
Not enough buyers and sellersactively trading that specific
strike and date.
The gap widens and you can getthis situation where maybe,
looking at the midpoint price,it looks like you have a profit,
but you can't actually get thatprofit because the bid price
you'd receive is too low.
Speaker 2 (12:35):
So, strategically, what do we do?
Our sources say focus on liquidoptions.
Speaker 3 (12:39):
Yes, liquid options are key.
Look for tight bid, ask spreads, high trading volume, lots of
open interest.
Speaker 2 (12:49):
And use limit orders, not market orders.
Speaker 3 (12:51):
Yeah, definitely use limit orders.
Try to get filled between thebid and ask if you can or at
least specify the price you'rewilling to pay or accept.
Speaker 2 (12:59):
Okay, and stick closer to the money.
Speaker 3 (13:01):
Generally, yeah.
Options closer to the currentstock price tend to be much more
liquid than those way out ofthe money ones.
Speaker 2 (13:07):
Makes sense.
Liquidity is your friend.
Speaker 3 (13:09):
It really is.
Minimizes those hidden costs,makes getting in and out
smoother and, hopefully, atbetter prices.
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Speaker 2 (13:50):
All right, let's tackle number seven.
This brings in one of thefamous Greeks, Delta.
If your delta is too low, thesources say even a good stock
move won't help your option much.
Explain delta in simple terms.
Speaker 3 (14:02):
Okay, delta, think of it as a sensitivity measure.
It tells you roughly how muchyour options price is expected
to change for every $1 change inthe underlying stock price.
Speaker 2 (14:13):
Okay.
Sensitivity to stock price.
Speaker 3 (14:15):
Right.
So an option with a delta near1.0, like a deep in the money
call, should theoretically movealmost dollar for dollar with
the stock.
Speaker 2 (14:23):
And a low delta.
Speaker 3 (14:24):
A delta close to zero means the options price barely
reacts to the stock price moving.
Speaker 2 (14:29):
So if I buy some super far out of the money call,
maybe its delta is only 0.10.
Speaker 3 (14:34):
Right Ten cents.
Speaker 2 (14:35):
Even if the stock jumps a whole dollar, my option
might only go up by about tencents.
That's not much leverage.
Speaker 3 (14:40):
Exactly.
That's probably not what mostpeople are looking for when they
buy options.
Speaker 2 (14:43):
The example they use is Stark a $150 call on $120
stock.
Delta's tiny maybe 0.08.
Stock goes up $2.
Speaker 3 (14:52):
Yeah, decent move.
Speaker 2 (14:53):
But the option only gains maybe 8 to 16 cents,
barely noticeable.
Speaker 3 (14:56):
Precisely those far OTM options just have very low
deltas.
They need huge stock moves toreally start gaining value
significantly.
So if you're only expecting asmall or moderate move, A low
delta option won't cut it.
Right, it just won't give youmuch price appreciation.
Speaker 2 (15:13):
So the guidance seems to be aim for options with a
delta maybe above 0.50, if youwant your option to track the
stock more closely.
Speaker 3 (15:20):
Generally yes, if that's your goal.
Lower delta options below 0.50,they're really more for
speculating on those really bigexplosive moves.
Speaker 2 (15:29):
Okay.
So delta tells you the bang foryour buck on a stock move.
That's a good way to put ityeah.
Reason eight this feels relatedto the volatility crash, but
slightly different Buying beforean expected move, maybe
earnings again, and the movejust fizzles, even if you got
the direction right.
Speaker 3 (15:46):
Yeah, it's closely related, like we touched on with
Hy-Vee, option prices oftenbuild in the anticipation of big
moves around known events.
The hype tax Kind of yeah, yeah, higher, free, higher premiums
leading up to it.
Now, if the event happens andthe actual stock move is kind of
less dramatic than everyone waspricing in, and the.
Hy-vee drops Exactly thatimplied volatility collapses,
(16:08):
and that drop can make youroption lose value.
Even if the stock actually wentthe way you thought, it would
Just not enough.
Speaker 2 (16:13):
So you buy a call before earnings.
You're right, earnings are good, stock goes up.
Speaker 3 (16:17):
Sounds great so far.
Speaker 2 (16:18):
But maybe the option market was pricing in, say, a
10% move and the stock only goesup 3%.
Right, your call could actuallylose value because that
built-in volatility premium justdeflated Our sources.
Had that great line.
You need to be more right thanexpected.
Speaker 3 (16:35):
That really sums it up perfectly.
It's not enough just to get thedirection right.
Yeah, the magnitude of the movehas to beat what the market was
already anticipating, which wasreflected in that high IV.
Speaker 2 (16:46):
So the advice be aware of the expected move.
Speaker 3 (16:51):
Definitely Check the expected move often shown on
option chains and justunderstand that buying options
right before big news is kind ofa double-edged sword because of
this dynamic.
Speaker 2 (17:00):
Requires understanding market
expectations and that potentialIV crush.
Speaker 3 (17:04):
Yeah, it adds another layer you need to consider
beyond just the stock direction.
Speaker 2 (17:08):
Okay, reason nine brings us back to the Greeks.
But sort of their combinedeffect.
The sources say even if thestock moves your way, theta time
decay and Vega volatilitysensitivity can both be working
against you.
How do they team up?
Speaker 3 (17:24):
Right, we talked about them individually, but
think about how they interact.
Delta might be positive, thestock's moving your way, pushing
the option price up, but at thesame time FEDA is always there
chipping away at the time value,especially as expiration gets
closer and vega means the priceis sensitive to IV changes.
So if IV is also dropping likeafter an earnings event Uh-oh
(17:44):
yeah.
Even dropping like after anearnings event, uh-oh yeah.
Even if Delta is trying to helpyou, that accelerating time
decay plus the drop in impliedvolatility can completely
overwhelm the positive Deltaeffect, yeah, you can end up
losing money overall.
Speaker 2 (17:56):
So I could have the stock going up, but I bought a
short-dated option right beforenews, when IV was high.
Speaker 3 (18:01):
A classic setup for this problem.
Speaker 2 (18:02):
Now IV is falling and time is ticking faster.
Yeah, both are pushing theoption price down, maybe even
harder than Delta is pushing itup.
Speaker 3 (18:09):
Exactly, it's this constant battle between the
Greeks.
Speaker 2 (18:12):
The material advises checking Delta, theta and Vega
before you trade.
Be wary if one negative Greeklooks like it could dominate
like high Theta on a low Deltaoption.
Speaker 3 (18:22):
That's the idea Get a more holistic picture of the
sensitivities.
Yeah, try to avoid situationswhere the headwinds from Theta
and Vega look like they mightjust swamp any potential
tailwind from Delta, given youroutlook.
Speaker 2 (18:35):
OK, makes sense.
Finally, reason 10.
This one feels like it's aboutdiscipline.
You just didn't exit when theoption was up, letting winners
turn into losers.
Speaker 3 (18:42):
Ah yes, trade management or lack thereof.
Options, especially the shorterterm ones or in high volatility
situations, can swing wildly inprice.
A nice profit can appear andthen disappear just as quickly.
If you get greedy or justaren't watching closely or don't
have a plan, time decay isrelentless, especially near the
end, and volatility can whiparound.
Speaker 2 (19:02):
The example they may have called goes from $1.50 up
to $2.50.
Looking good.
Speaker 3 (19:07):
Yeah, nice gain.
Speaker 2 (19:08):
But hold on hoping for more and then it drops back
to $1 because time decay justcrushed it in the last few days
Painful.
Speaker 3 (19:15):
Very painful and all too common.
The material really stresseshaving a plan, have a profit
target or maybe use a trailingstop loss to lock in some gains
automatically.
Speaker 2 (19:27):
Don't get greedy.
Speaker 3 (19:28):
Basically, yes, Emotional discipline is huge in
options.
Often taking a solid,reasonable profit is much
smarter than holding out forevery last penny and risking
giving it all back, especiallywith these decaying assets.
Speaker 2 (19:41):
Wow, okay.
So pulling it all together, thebig message is it's actually
pretty normal for an optiontrade to lose money, even if you
were right about the stock'sdirection.
Speaker 3 (19:50):
It happens all the time.
It's this complex interplay,isn't it?
Stock price time left marketexpectations of volatility.
All those Greeks workingtogether or against each other.
Speaker 2 (19:59):
It's not just about being right.
You have to be right fastenough.
Speaker 3 (20:02):
Right and with the right amount of volatility
priced in, or maybe volatilitymoving in your favor.
Speaker 2 (20:07):
And the move has to be big enough to overcome all
those other factors like time,decay and the initial cost.
Speaker 3 (20:13):
Exactly.
It's less about just beingright on the stock and more
about understanding theprobability of the whole option
trade working out, consideringall these interconnected forces.
Speaker 2 (20:23):
So connecting this back to you, the listener.
It's about moving beyond justguessing stock direction.
Speaker 3 (20:29):
Yeah, it's about getting more sophisticated
understanding the mechanics,thinking not just where the
stock might go, but when and byhow much, and what the market
already thinks might happen viaIV.
Speaker 2 (20:40):
Absolutely.
So maybe before your next trade, run through a quick mental
checklist.
Speaker 3 (20:44):
Good idea.
Speaker 2 (20:45):
Like do I really know my break-even?
Am I aware of how theta vegadelta might affect this specific
option?
Did I pick the right strike andexpiration for what I expect?
Have I thought about volatilityand, crucially, what's my exit
plan for profits and losses?
Speaker 3 (21:01):
Those are exactly the right questions Asking.
Those can seriously improveyour odds and help you avoid
that frustration when you callthe stock right but the option
doesn't follow.
Speaker 2 (21:09):
Yeah, Look, no strategy guarantees profits.
Right Options are tricky, butreally understanding these
principles gives you more power,helps you navigate the
complexity and maybe cuts downon those nasty surprises.
It's worth taking a moment justto consider how all these
different forces are alwaysinteracting, always shaping the
value of these reallyfascinating financial tools.
Speaker 3 (21:33):
This is an AI podcast based on educational material
from Option Genius.
Visit us today atoptiongeniuscom.
Welcome to the Options Trading Podcast.
We're on a mission to empowerindividual investors with the
knowledge they need.
Join us as we break downcomplex topics into simple,
step-by-step guidance forconservative options trading.
Speaker 2 (00:16):
Okay, let's dive right in.
So picture this you totallynailed the stock direction,
Bought a call, stock went up, sowhere's the profit?
Right, or maybe you grabbed a,put the stock tank.
You're feeling pretty good,Except well, your option's just
not playing ball.
It's frustrating, isn't it?
Speaker 3 (00:33):
Oh, definitely, and you know, it's amazing how
common that feeling is.
That wait, I got the main idearight.
Why isn't this trade working?
Speaker 2 (00:41):
Exactly.
It really makes you questionwhat's actually moving these
option prices Totally so.
Today we're really digging intowhy your option can be so
stubborn, even when the stockdoes exactly what you thought it
would.
We've got some great materialhere that gets right to the
heart of these well, sometimesmaddening parts of option
pricing.
Think of this as, like yourbackstage pass.
(01:04):
We want to understand thehidden gears turning behind the
scenes so you can trade smarterand hopefully have fewer of
those head scratching moments.
Speaker 3 (01:11):
Yeah, the goal really is to equip you with that
deeper knowledge to see pastjust the stock price.
Speaker 2 (01:16):
Because options aren't just simple up or down
bets, are they?
Speaker 3 (01:20):
Not at all.
If you sort of step back, yousee there are these complex
things.
Really they have their ownrules, their own sensitivities.
You really have to payattention.
Speaker 2 (01:28):
All right, so let's tackle the first big reason.
Our sources point to time decay.
You know theta.
What is this really, and whydoes it feel like it's always
working against option buyers?
Speaker 3 (01:38):
Well, think of time, decay theta like evaporation, or
maybe a melting ice cube.
As that option gets closer andcloser to its expiration date,
its value just kind of shrinks,simply because there's less time
left for the big move you'rehoping for to actually happen.
It's like buying fruit it'sperishable.
(01:59):
Its value goes down as it getscloser to expiring, even if the
price of, say, the underlyingstock stays exactly the same.
Speaker 2 (02:06):
That makes sense.
So even if the stock price isjust treading water, if that
expiration date is looming, thatclock is just ticking away,
eating at my options value.
Speaker 3 (02:15):
Precisely.
Speaker 2 (02:15):
Our sources give this example right Buying a call
only five days left, stock goesup maybe two bucks.
Feels good.
Speaker 3 (02:21):
Yeah, seems like a win.
Speaker 2 (02:22):
But the option still loses money because of that time
running out.
Speaker 3 (02:26):
Exactly, and the really key thing to grasp here
is that this erosion, this decay, it actually speeds up the
closer you get to expirationRight.
Those really short term options, the weeklies or ones with just
a few days left, they feel thismuch, much faster.
Even a day or two can make ahuge difference to their price.
You know, a deeper thoughtmight be trying to structure
(02:50):
trades, maybe after volatilityhas been low for a bit, or maybe
theta isn't the biggest forcecompared to a potential move.
Speaker 2 (02:54):
That's interesting, so okay for us listening, trying
to learn from this.
What's the practical advice ontime decay?
Speaker 3 (03:01):
Well, the material we really suggest giving your
trades enough time, don't rushthem.
Maybe aim for options with, say, 30 to 60 days left Gives you a
bit of a buffer against thatconstant ticking clock.
But if you do go for thoseshorter ones, just understand
the stock needs to movedecisively and fast.
Got it?
Makes sense.
Speaker 2 (03:21):
Okay, reason number two for why our seemingly
winning stock bet might turninto a losing option trade a
drop in implied volatility, vega.
Now this one feels a bit moreabstract.
Speaker 3 (03:34):
Yeah, it can be.
Speaker 2 (03:35):
Can you break down implied volatility IV and how a
drop in it can hurt, even if thestock does what I wanted, sure.
Speaker 3 (03:42):
So implied volatility or IV.
It's basically the market'scollective expectation.
It's a guess about how much astock's price is likely to swing
around in the future.
Speaker 2 (03:50):
Okay, the market's prediction of movement.
Speaker 3 (03:52):
Right, and if the market expects big swings,
higher volatility, then optionprices go up because there's a
sort of perceived higher chancethe option could end up making
money.
Speaker 2 (04:01):
Makes sense, Higher chance of a big move higher
premium Exactly.
Speaker 3 (04:10):
But here's the thing those expectations can change
sometimes really fast,especially around big events
like earnings reports.
Speaker 2 (04:13):
Ah, the famous volatility crush.
Speaker 3 (04:14):
That's the one.
Speaker 2 (04:14):
Our sources talk about this how EV often balloons
before these big announcementsand then just collapses
afterward, almost no matter ifthe news was good or bad for the
stock price itself.
Speaker 3 (04:24):
Precisely so you might buy a call before earnings
.
Right, You're expecting a jump.
The company reports greatnumbers.
The stock does go up Should begood news for your call.
You'd think so.
But if that implied, volatilityjust tanks after the
announcement because, well, theuncertainty is gone.
Now the value of your optioncan actually drop.
Speaker 2 (04:45):
Wow.
Speaker 3 (04:46):
Yeah, it can completely offset the gains you
got from the stock moving up.
Speaker 2 (04:50):
So the market already baked in the possibility of a
big move, and once thatpossibility either doesn't
happen dramatically enough orjust the uncertainty is resolved
, that extra premium justevaporates.
Speaker 3 (05:02):
Oof Gone.
Speaker 2 (05:03):
Okay, that's a tough one.
So what can you do?
How do you protect yourselffrom that IV crush?
Speaker 3 (05:09):
Well, the main insight here is probably caution
.
Be careful buying options rightbefore those big known events,
unless you have really strongconviction, the stock is going
to move way more than themarkets already expect.
Speaker 2 (05:19):
Right more than the implied move.
Speaker 3 (05:21):
Exactly, and the material also flips it around.
Suggests maybe thinking aboutselling options when IV is super
high, that you'd actuallybenefit from that volatility
coming back down.
Speaker 2 (05:30):
Huh, that's a different way to play it
entirely.
Okay, interesting, let's moveon.
Reason three the move justwasn't big enough.
The stock moved your way, butit was too small.
Seems simple, but there's moreto it than just the dollar
amount.
Speaker 3 (05:44):
Absolutely See.
An options price has, well, twomain components.
There's intrinsic value andextrinsic value.
Intrinsic value is the sort ofreal tangible in the money
amount.
For a call, it's how much thestock price is above the strike
price.
For a put, it's the other wayaround.
Speaker 2 (05:59):
Got it, the actual profit baked in right now.
Speaker 3 (06:02):
Pretty much Extrinsic value is everything else.
Mostly it's about the time leftuntil expiration, and that
implied volatility we justtalked about Right.
So if the stock moves your way,but not enough to get your
option deep in the money, ormaybe it just barely gets in the
money, that gain in intrinsicvalue might get totally canceled
out by the extrinsic value justmelting away.
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Speaker 2 (07:12):
And this is where the break-even point becomes so
critical, isn't it?
Our sources really hammer thisDefinitely For a call, it's your
strike price plus what you paidfor the option the premium.
If the stock doesn't get abovethat level, you're still losing
money.
The example they use buying$100 strike call for $3, the
stock starts at $98, goes up to$101.
(07:33):
You were right, it went up.
Speaker 3 (07:35):
Yeah, directionally correct.
Speaker 2 (07:36):
But your break even is $103.
So $101 isn't good enough,still down money.
Speaker 3 (07:41):
Exactly so.
Even though the stock moved up,the option was out of the money
for a lot of its life.
Maybe just briefly touchedbeing in the money, but by then
time decay and maybe lowervolatility have already chipped
away at any potential profit.
Speaker 2 (07:55):
So the big lesson know your break-even price, like
really know it, before youtrade.
Speaker 3 (08:02):
Absolutely critical.
Speaker 2 (08:03):
And our sources suggest maybe for smaller moves.
Look at in the money option.
Speaker 3 (08:07):
That's a good point.
They make, yeah, itm options.
They cost more upfront, sure,but they already have intrinsic
value, so they tend to be a bitless sensitive to that extrinsic
value just evaporating becauseof time or volatility shifts.
Speaker 2 (08:19):
Okay, that makes sense.
Let's hit reason number four.
The option was just too far outof the money.
We're talking deep OTM.
These are the cheap ones, right?
The lottery tickets.
Speaker 3 (08:29):
Often, yeah, they look tempting because the price
is low.
Speaker 2 (08:31):
So what's the problem if the stock makes a small move
?
My way.
Speaker 3 (08:36):
Well, these out-of-the-money or OTM options.
They start with zero intrinsicvalue, None.
Speaker 2 (08:42):
Right, because the stock isn't there yet.
Speaker 3 (08:43):
Exactly.
Their entire price is basedpurely on the possibility, the
hope that the stock will make areally big move before the
option expires.
Speaker 2 (08:52):
So they need a home run.
Speaker 3 (08:53):
Pretty much.
They need a significant, oftenfast, price surge to even start
looking profitable.
A small move, a gradual climbin the right direction.
Usually that's just not enoughto overcome being so far away
from the money initially.
Plus, they get hit hard by timedecay and volatility changes
too.
Speaker 2 (09:10):
The example used is buying a $120 call when the
stock's at $110.
Then the stock climbs to $113.
$3 move up.
That's positive.
Sounds okay on the surface.
Speaker 3 (09:21):
But the option is still $7 away from being in the
money.
Speaker 2 (09:24):
Exactly.
The chance of that optionactually gaining much value from
just a $3 stock move is reallylow.
It might not go up in price atall, or it could even go down.
Yeah, the sources point thatout.
It could actually decreasebecause time value is still
ticking away.
Or maybe IV dropped a bit.
Speaker 3 (09:38):
Wow.
So those cheap deep OTM optionsreally are high stakes gambles,
Very much so.
The advice seems to be avoidthem unless you really are
treating it like a lotteryticket expecting a massive move.
Otherwise, maybe look atoptions closer to the money,
slightly OTM, or even at themoney for more moderate
(09:59):
expectations.
Speaker 2 (10:00):
That's the key takeaway.
You need to align the strikeprice you choose with how big a
move you realistically think thestock will make.
Speaker 3 (10:06):
Okay, reason five is one of those do all moments.
Yeah, the stock moved, butafter your option expired, we've
all been there Timing justslightly.
Speaker 2 (10:14):
Oh yeah, that one stings.
Options have a shelf life right, a very specific expiration
date.
Speaker 3 (10:19):
If the move you predicted happens the day after
it expires, well too bad.
The option's worthless.
It doesn't matter how right youwere about the direction.
Eventually it's all abouttiming.
Speaker 2 (10:29):
The example in the material having a weekly put
expires Friday, then Mondaymorning bam the stock tanks.
Speaker 3 (10:36):
Yeah, that perfectly captures that missed opportunity
feeling.
Speaker 2 (10:40):
It really highlights how crucial it is to give your
trade enough time, doesn't it?
Speaker 3 (10:44):
Absolutely Short term options.
They offer more leverage, whichis tempting, but, man, they
demand precision timing.
So, unless you're scalping ortrading a specific event with a
known deadline, yeah, unlessyou're doing something very
specific and short term, it'sgenerally smarter to choose
options with at least a fewweeks, maybe even a month or two
, until expiration.
Speaker 2 (11:04):
Gives your idea some breathing room.
Speaker 3 (11:05):
Exactly A buffer for your thesis to actually play out
.
Speaker 2 (11:08):
Lesson learned Give it time.
Okay, Now let's get intosomething a bit more subtle.
Maybe Poor fill or wide bid-askspreads.
Reason number six what's goingon here?
Speaker 3 (11:18):
So for options that don't trade a lot, they're
illiquid.
Speaker 2 (11:21):
Yeah.
Speaker 3 (11:22):
There can be a pretty big gap between the highest
price someone is willing to paythat's the bid Right and the
lowest price someone is willingto sell it for the ask.
That gap is the bid ask spread.
Okay Now, if you just hit buymarket, you usually pay the
higher ask price and when yousell you usually get the lower
bid price.
So a widespread means you'restarting off at a disadvantage
(11:44):
right away.
It costs you money just to getin or out.
Speaker 2 (11:47):
Ah.
So even if the stock moves myway and my option should be
worth more, if the specificoption I'm holding is really
illiquid with a wide spread, theprice I can actually sell it
for the bid might not havecaught up enough.
Speaker 3 (12:01):
Exactly.
Speaker 2 (12:01):
Or it might not even cover that initial spread cost.
The example they gave buy at$1.50, but the market was $1.20,
bid $1.80, ask.
That's a huge spread.
Speaker 3 (12:11):
Yeah, 60 cents.
Speaker 2 (12:12):
Then the stock moves well, but the bid only goes up
to $1.25.
You're still way down becauseof that spread friction.
Speaker 3 (12:23):
Precisely Low liquidity is the culprit.
Not enough buyers and sellersactively trading that specific
strike and date.
The gap widens and you can getthis situation where maybe,
looking at the midpoint price,it looks like you have a profit,
but you can't actually get thatprofit because the bid price
you'd receive is too low.
Speaker 2 (12:35):
So, strategically, what do we do?
Our sources say focus on liquidoptions.
Speaker 3 (12:39):
Yes, liquid options are key.
Look for tight bid, ask spreads, high trading volume, lots of
open interest.
Speaker 2 (12:49):
And use limit orders, not market orders.
Speaker 3 (12:51):
Yeah, definitely use limit orders.
Try to get filled between thebid and ask if you can or at
least specify the price you'rewilling to pay or accept.
Speaker 2 (12:59):
Okay, and stick closer to the money.
Speaker 3 (13:01):
Generally, yeah.
Options closer to the currentstock price tend to be much more
liquid than those way out ofthe money ones.
Speaker 2 (13:07):
Makes sense.
Liquidity is your friend.
Speaker 3 (13:09):
It really is.
Minimizes those hidden costs,makes getting in and out
smoother and, hopefully, atbetter prices.
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?
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Speaker 2 (13:50):
All right, let's tackle number seven.
This brings in one of thefamous Greeks, Delta.
If your delta is too low, thesources say even a good stock
move won't help your option much.
Explain delta in simple terms.
Speaker 3 (14:02):
Okay, delta, think of it as a sensitivity measure.
It tells you roughly how muchyour options price is expected
to change for every $1 change inthe underlying stock price.
Speaker 2 (14:13):
Okay.
Sensitivity to stock price.
Speaker 3 (14:15):
Right.
So an option with a delta near1.0, like a deep in the money
call, should theoretically movealmost dollar for dollar with
the stock.
Speaker 2 (14:23):
And a low delta.
Speaker 3 (14:24):
A delta close to zero means the options price barely
reacts to the stock price moving.
Speaker 2 (14:29):
So if I buy some super far out of the money call,
maybe its delta is only 0.10.
Speaker 3 (14:34):
Right Ten cents.
Speaker 2 (14:35):
Even if the stock jumps a whole dollar, my option
might only go up by about tencents.
That's not much leverage.
Speaker 3 (14:40):
Exactly.
That's probably not what mostpeople are looking for when they
buy options.
Speaker 2 (14:43):
The example they use is Stark a $150 call on $120
stock.
Delta's tiny maybe 0.08.
Stock goes up $2.
Speaker 3 (14:52):
Yeah, decent move.
Speaker 2 (14:53):
But the option only gains maybe 8 to 16 cents,
barely noticeable.
Speaker 3 (14:56):
Precisely those far OTM options just have very low
deltas.
They need huge stock moves toreally start gaining value
significantly.
So if you're only expecting asmall or moderate move, A low
delta option won't cut it.
Right, it just won't give youmuch price appreciation.
Speaker 2 (15:13):
So the guidance seems to be aim for options with a
delta maybe above 0.50, if youwant your option to track the
stock more closely.
Speaker 3 (15:20):
Generally yes, if that's your goal.
Lower delta options below 0.50,they're really more for
speculating on those really bigexplosive moves.
Speaker 2 (15:29):
Okay.
So delta tells you the bang foryour buck on a stock move.
That's a good way to put ityeah.
Reason eight this feels relatedto the volatility crash, but
slightly different Buying beforean expected move, maybe
earnings again, and the movejust fizzles, even if you got
the direction right.
Speaker 3 (15:46):
Yeah, it's closely related, like we touched on with
Hy-Vee, option prices oftenbuild in the anticipation of big
moves around known events.
The hype tax Kind of yeah, yeah, higher, free, higher premiums
leading up to it.
Now, if the event happens andthe actual stock move is kind of
less dramatic than everyone waspricing in, and the.
Hy-vee drops Exactly thatimplied volatility collapses,
(16:08):
and that drop can make youroption lose value.
Even if the stock actually wentthe way you thought, it would
Just not enough.
Speaker 2 (16:13):
So you buy a call before earnings.
You're right, earnings are good, stock goes up.
Speaker 3 (16:17):
Sounds great so far.
Speaker 2 (16:18):
But maybe the option market was pricing in, say, a
10% move and the stock only goesup 3%.
Right, your call could actuallylose value because that
built-in volatility premium justdeflated Our sources.
Had that great line.
You need to be more right thanexpected.
Speaker 3 (16:35):
That really sums it up perfectly.
It's not enough just to get thedirection right.
Yeah, the magnitude of the movehas to beat what the market was
already anticipating, which wasreflected in that high IV.
Speaker 2 (16:46):
So the advice be aware of the expected move.
Speaker 3 (16:51):
Definitely Check the expected move often shown on
option chains and justunderstand that buying options
right before big news is kind ofa double-edged sword because of
this dynamic.
Speaker 2 (17:00):
Requires understanding market
expectations and that potentialIV crush.
Speaker 3 (17:04):
Yeah, it adds another layer you need to consider
beyond just the stock direction.
Speaker 2 (17:08):
Okay, reason nine brings us back to the Greeks.
But sort of their combinedeffect.
The sources say even if thestock moves your way, theta time
decay and Vega volatilitysensitivity can both be working
against you.
How do they team up?
Speaker 3 (17:24):
Right, we talked about them individually, but
think about how they interact.
Delta might be positive, thestock's moving your way, pushing
the option price up, but at thesame time FEDA is always there
chipping away at the time value,especially as expiration gets
closer and vega means the priceis sensitive to IV changes.
So if IV is also dropping likeafter an earnings event Uh-oh
(17:44):
yeah.
Even dropping like after anearnings event, uh-oh yeah.
Even if Delta is trying to helpyou, that accelerating time
decay plus the drop in impliedvolatility can completely
overwhelm the positive Deltaeffect, yeah, you can end up
losing money overall.
Speaker 2 (17:56):
So I could have the stock going up, but I bought a
short-dated option right beforenews, when IV was high.
Speaker 3 (18:01):
A classic setup for this problem.
Speaker 2 (18:02):
Now IV is falling and time is ticking faster.
Yeah, both are pushing theoption price down, maybe even
harder than Delta is pushing itup.
Speaker 3 (18:09):
Exactly, it's this constant battle between the
Greeks.
Speaker 2 (18:12):
The material advises checking Delta, theta and Vega
before you trade.
Be wary if one negative Greeklooks like it could dominate
like high Theta on a low Deltaoption.
Speaker 3 (18:22):
That's the idea Get a more holistic picture of the
sensitivities.
Yeah, try to avoid situationswhere the headwinds from Theta
and Vega look like they mightjust swamp any potential
tailwind from Delta, given youroutlook.
Speaker 2 (18:35):
OK, makes sense.
Finally, reason 10.
This one feels like it's aboutdiscipline.
You just didn't exit when theoption was up, letting winners
turn into losers.
Speaker 3 (18:42):
Ah yes, trade management or lack thereof.
Options, especially the shorterterm ones or in high volatility
situations, can swing wildly inprice.
A nice profit can appear andthen disappear just as quickly.
If you get greedy or justaren't watching closely or don't
have a plan, time decay isrelentless, especially near the
end, and volatility can whiparound.
Speaker 2 (19:02):
The example they may have called goes from $1.50 up
to $2.50.
Looking good.
Speaker 3 (19:07):
Yeah, nice gain.
Speaker 2 (19:08):
But hold on hoping for more and then it drops back
to $1 because time decay justcrushed it in the last few days
Painful.
Speaker 3 (19:15):
Very painful and all too common.
The material really stresseshaving a plan, have a profit
target or maybe use a trailingstop loss to lock in some gains
automatically.
Speaker 2 (19:27):
Don't get greedy.
Speaker 3 (19:28):
Basically, yes, Emotional discipline is huge in
options.
Often taking a solid,reasonable profit is much
smarter than holding out forevery last penny and risking
giving it all back, especiallywith these decaying assets.
Speaker 2 (19:41):
Wow, okay.
So pulling it all together, thebig message is it's actually
pretty normal for an optiontrade to lose money, even if you
were right about the stock'sdirection.
Speaker 3 (19:50):
It happens all the time.
It's this complex interplay,isn't it?
Stock price time left marketexpectations of volatility.
All those Greeks workingtogether or against each other.
Speaker 2 (19:59):
It's not just about being right.
You have to be right fastenough.
Speaker 3 (20:02):
Right and with the right amount of volatility
priced in, or maybe volatilitymoving in your favor.
Speaker 2 (20:07):
And the move has to be big enough to overcome all
those other factors like time,decay and the initial cost.
Speaker 3 (20:13):
Exactly.
It's less about just beingright on the stock and more
about understanding theprobability of the whole option
trade working out, consideringall these interconnected forces.
Speaker 2 (20:23):
So connecting this back to you, the listener.
It's about moving beyond justguessing stock direction.
Speaker 3 (20:29):
Yeah, it's about getting more sophisticated
understanding the mechanics,thinking not just where the
stock might go, but when and byhow much, and what the market
already thinks might happen viaIV.
Speaker 2 (20:40):
Absolutely.
So maybe before your next trade, run through a quick mental
checklist.
Speaker 3 (20:44):
Good idea.
Speaker 2 (20:45):
Like do I really know my break-even?
Am I aware of how theta vegadelta might affect this specific
option?
Did I pick the right strike andexpiration for what I expect?
Have I thought about volatilityand, crucially, what's my exit
plan for profits and losses?
Speaker 3 (21:01):
Those are exactly the right questions Asking.
Those can seriously improveyour odds and help you avoid
that frustration when you callthe stock right but the option
doesn't follow.
Speaker 2 (21:09):
Yeah, Look, no strategy guarantees profits.
Right Options are tricky, butreally understanding these
principles gives you more power,helps you navigate the
complexity and maybe cuts downon those nasty surprises.
It's worth taking a moment justto consider how all these
different forces are alwaysinteracting, always shaping the
value of these reallyfascinating financial tools.
Speaker 3 (21:33):
This is an AI podcast based on educational material
from Option Genius.
Visit us today atoptiongeniuscom.
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