2

This is the Option Chart for TSLA JUNE 18 2021 $1050 CALL. It was bought for $47.50 per option. The underlying price was $645 when it was bought. Now after 8 days, the option value is $33.25. The underlying price of the stock is the same as 8 days ago which is $645.

I don't understand why the Implied Volatility has gone down so much which might have happened here. Is the volume low or PUT options for the same expiration are increasing causing this drop?

What should happen for the IV to go high? There is no guarantee that the price of the option to go higher even if the stock price reaches $800 or $1000.

Any help to understand what is happening here is appreciated.

UPDATE on 12/21: After TSLA has been added to S&P today, the IV dropped to 65%. The 51% is what the trading platform showed during the 5 minutes before on last Friday.

Some of my reading show that it is incorrect to assign that when the price goes up, the IV will go higher. As an example, when the crash happened in March this year, the SPY IV went up. TSLA is known for IV crash after a major event when the Price and IV goes up. Then IV drops significantly.

enter image description here

IV Chart:

enter image description here

2
  • 1
    Why does any stock sometimes trade wildly up or down even though "nothing changed" that week? – Kaz Dec 17 '20 at 18:21
  • 1
    Things change all of the time. Analysts might upgrade or downgrade a stock. There may be product news. The stock may be tracking the market ("A rising tide lifts all boats"). There could be institutional reallocation. There could even be some rumors moving the stock. If price is "trading wildly up or down", something is going on, moving it. – Bob Baerker Dec 22 '20 at 4:09
5

8 days ago, With TSLA at $645 and the 6/21 $1050 call at $47.50, your call's IV was 77.05%.

Today, with TSLA at $645 and the 6/21 $1050 call at $33.25, the IV is 68.95%.

IV fluctuates daily based on news as well as general market conditions. In this case, IV contracted over the past 8 days and therefore so did option premium. You can see a graph of the average implied volatility demonstrating this at Ivolatility (free sign up).

5
  • I added the IV Chart for TSLA to the original post. In the last 14 days, it shows as 91.45%. Where should I look at to see 77.05%? – wonderful world Dec 18 '20 at 12:03
  • 2
    @wonderful world - Here's an Implied Volatility calculator. Put in the data from 8 days earlier. Calculate IV. Then subtract 8 days and change the call's price and recalculate the IV. – Bob Baerker Dec 18 '20 at 12:38
  • After TSLA's last 5 minutes trade today, the IV dropped to 51%. The price went up to $695 but the IV dropped 20%. I believe it is not an error. – wonderful world Dec 19 '20 at 1:30
  • I updated the original post with the changes to TSLA after being added to the S&P. For the last 2 weeks or so, the IV dropped from 77% to 69% last Friday to 65% today. – wonderful world Dec 21 '20 at 15:39
  • 1
    @wonderful world - IV will vary from strike to strike (for example, volatility smile) as well as from expiration to expiration (nearer expirations tend to have higher IV than more distant unless there's a news even like an earnings announcement in there). Note that there are a number of ways to calculate average IV for the the options of a security so the average IV may vary from broker to broker. – Bob Baerker Dec 21 '20 at 15:58
2

In addition to Bob's (correct) explanation: when you bought them, the news that TSLA gets in the S&P 500 was new, and the sky was the limit for its share price. A lot of people thought it could go very high up, and a lot of (other) people thought it might come down badly.
Now, some days later, a lot of smoke has cleared, and the emotions are not flying that high anymore, so volatility is lower, and therefore, options prices are lower. Maybe tomorrow (which is Dec/18, the last day before the S&P500 inclusion), the fireworks will start again, who knows.

Options trading needs to consider that price depends on volatility, which depends on emotions and news. The formula's predictive power is limited for a thriller like TSLA.

11
  • 3
    It never ceases to amaze me how many people who dabble in options have no clue how implied volatility factors into option price. The classic example is buying an option within a few days of an earnings announcement and then after the earnings announcement, wondering "WTH happened to my option???". And truth be told, that was me 35+ years ago. The big difference is that there was no internet then and information was much harder to come by then versus today when there are so many good sources on the net. – Bob Baerker Dec 18 '20 at 5:12
  • 2
    You know there is no money 'created' at the markets? Someone has to take losses for your profits... so don't complain... – Aganju Dec 18 '20 at 5:23
  • I don't think many trading platforms show the Implied Volatility like the prices in a chart. – wonderful world Dec 18 '20 at 12:09
  • 1
    @wonderful world - If they offer IV, brokers are more likely to just show the current IV of the option. The big name discount brokers are playing catch up with the more sophisticated trading platforms. – Bob Baerker Dec 18 '20 at 12:33
  • Just in the last 2 minutes before closing, TSLA price went upto $695 but the IV dropped from 70% to 50%. That is 20% drop. Unbelievable if it is not an error. – wonderful world Dec 19 '20 at 1:33
1

There is quite a degree of latitude for market makers to play pricing games in less liquid markets.

The options pricing formulas are a shared reference value, with IV really being closer to a "remainder" in a math formula, used to explain the unexplainable.

The reality is that the market - which includes market makers - simply decide to trade at a certain price. If someone would sell that contract for 90% less and someone would buy that contract for 90% less, that trade of $3 would appear on the chart. If its a good deal then you can consider being the person to buy that contract and sell it at its proper price.

4
  • 1
    I don't follow your points. The market is an auction. Every security that trades is based on where the market, including market makers decide to trade at (price). However, if you're implying that they are controlling the price, that's not true. Anyone submitting an order at a better price becomes and determines the market on that side. And the $3 trade? The NBBO quote right now is $36.90 x $37.70. No one is going to be able to buy or sell it for $3. – Bob Baerker Dec 17 '20 at 18:12
  • 1
    @BobBaerker I'm not implying controlling price at all, the market is an auction anyone can match orders offered. If you read any other interpretation, scrap it and read it as I intended. – CQM Dec 17 '20 at 21:11
  • 1
    Let me phrase this more clearly. Your answer makes no sense regarding the question that the OP posed. TSLA options are active and illiquid and even the illiquid ones X months out and deep in or out-of-the money are not going to stray much from fair value because that would provide an arb with nearby strikes. The loss of premium in the OP's data was clearly due to a large across the board average implied volatility contraction (20 basis points) over the past week. Click the IVolatility link that I provided in my answer if you want to see the stats. – Bob Baerker Dec 17 '20 at 23:34
  • 1
    @BobBaerker nice to see that level of liquidity. – CQM Dec 18 '20 at 1:28

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.