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I purchased 1000 put options on SPY for $9,706 or $9.70 per contract. The strike price is $334 and expires in about 3 months. At the time I purchased this was ITM and SPY was selling at $334.

By market close, the price of SPY moved to $333.45.

I figured my put options would be more valuable with the move down, however I had a loss of $486.64. Each option now had a market value of $9.22.

How can this be? Also, at what price would SPY need to move down to start showing a gain?

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Some small corrections:.

  • If the strike price of your put is $334 and the SPY was $334 at the time of purchase then the option was at-the-money not in-the-money.

  • If the premium was was $9.70 per contract and the cost was $9,706 ($6 commission) then you bought 10 puts which controls 1,000 shares.

In isolation, your puts would have appreciated about 25 cents if the SPY had dropped 55 cents immediately after you bought them. But they didn't. There are 3 reasons that could have contibuted to the loss:

  • As soon as you take a position, there's a built in loss because you buy at the ask and sell at the bid. For SPY options this is approximately 5-10 cents.

  • Implied volatility shrank, reducing the value of your puts

  • You bought these puts as much 10 days ago and you have experienced time decay

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  • Thanks @Bob Baerker . As for the portion of my question asking about an incurease in value; if SPY drops to $332, would my put options increase in value? Would it have been better for me to buy OTM if I was anticipating a downward movement in the stock price? Thanks again for all of your explanation. – Atma Feb 22 at 16:55
  • If SPY dropped to $332 immediately, your puts would increase in value unless there was a contraction in implied volatility (IV). If there was no IV contraction and the drop to $332 took 2 weeks, your puts would lose money because of time decay. Do you understand the effect of implied volatility on option premium? OTM puts would have a lower delta than ATM or ITM and therefore would profit less if the SPY dropped. – Bob Baerker Feb 22 at 17:08
  • I’m new to options contracts but I think I understand IV. It is the subjective portion of the black-scholes formula. In a real world example, if say the odds of a worldwide pandemic went down substantially because a vaccine was created, that would cause IV to contract. How much time cushion should I leave in the expiration to avoid rapid time decay? – Atma Feb 22 at 17:22
  • Yes, that's the general idea with IV. "How much time cushion should I leave in the expiration to avoid rapid time decay?" A loose rule of thumb is that the premium for ATM options is related to the square root of the time remaining, with all other pricing parameters being equal. IOW, time decay is non linear and the further out expiration is, the slower the time decay. That’s why writers tend to sell nearer weeks/months and buyers tend to buy further out weeks/months. However, a short term trader is going to trade closer expirations. So it depends on your time frame. – Bob Baerker Feb 22 at 17:28

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