Options Question.

newbie1234 said: "Let's say that the stock drops $0.10-$.30 cents, how come the options can be down about the same amount? I mean, the options drops faster than the stock. Anyone know why this happen? One example, RHT."

Rickster said: "Give me a little more to go on. Which strike price and which month? Calls or puts?"

holzie said: "Your question is not difficult at all. The problem is that you were not really specific, though you included a company name. Without an specific example, my answer would be too complex and too long so I will pick an example for you and maybe you will understand better. RHT stock: $22.12 (change -.19) RHT April 22.50 call 0.45 (change -0.10) ------------------------------------------------------- Now you know that options are priced on a slightly improved version of the Black-Scholes model but if you already know the current price of the stock and the options you can estimate the change. What you need to know for the option is called delta. Unfortunately you cannot find delta on yahoo. The delat of the RHT April 22.50 call is 0.43 right now. We will presume that all the other greeks and implied volatility stays exactly the same. What the delta of 0.43 or 43 tells you that if the stock will go up $1, the option will go up $0.43. It is the same for downward movement, thus 0.19 * 0.43 = 0.082, which you have to round up to 5 cent increment, which will give you 0.10 change down. But when it comes to options, you don't compare really exact dollar movements but rather yield or loss. See it this way. If you held 1 share of RHT today, you lost $0.19 or 0.85% on your investment. If you held the April 22.50 call and lost $0.10 it translates to a 19% loss in one day, which is 20 times greater than your stock. So now you can see that options indeed move way faster than stocks. You have to look at it the right way. Holz."

newbie1234 said: "[QUOTE=holzie]Your question is not difficult at all. The problem is that you were not really specific, though you included a company name. Without an specific example, my answer would be too complex and too long so I will pick an example for you and maybe you will understand better. RHT stock: $22.12 (change -.19) RHT April 22.50 call 0.45 (change -0.10) ------------------------------------------------------- Now you know that options are priced on a slightly improved version of the Black-Scholes model but if you already know the current price of the stock and the options you can estimate the change. What you need to know for the option is called delta. Unfortunately you cannot find delta on yahoo. The delat of the RHT April 22.50 call is 0.43 right now. We will presume that all the other greeks and implied volatility stays exactly the same. What the delta of 0.43 or 43 tells you that if the stock will go up $1, the option will go up $0.43. It is the same for downward movement, thus 0.19 * 0.43 = 0.082, which you have to round up to 5 cent increment, which will give you 0.10 change down. But when it comes to options, you don't compare really exact dollar movements but rather yield or loss. See it this way. If you held 1 share of RHT today, you lost $0.19 or 0.85% on your investment. If you held the April 22.50 call and lost $0.10 it translates to a 19% loss in one day, which is 20 times greater than your stock. So now you can see that options indeed move way faster than stocks. You have to look at it the right way. Holz.[/QUOTE] Thanks. I'm learning about options, and I bought only 5 contracts of RHT, strike price at $22.50 at $0.65, now the options worth $.040. I chose to spend a little cash (less than $400) to see how options behave...I don't think I'm ready for this yet. Thanks again."

holzie said: "Ok, well now you know :) If I was you I would sell the options for 0.40 to cut your losses. There is no way in hell RHT is going over $22. Each day your options loose money because of rapid time decay so unless you expect the stock to make a 0.50 or better move in one day this week, you will not recoup your cost."