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How does a put option lose its value?
- lee
- Dec 24, 2017
- 1 min read
A put option can lose value in three different ways:
If the stock moves up in price, put option values will go down
As time moves towards expiration, put option values will go down
If the volatility of the stocks lessens, put option values will go down.
An option’s price (both calls & puts) are determined by the stock price, how much time is left until expiration and the level of volatility of the stock.
When any of those three determinants changes, the value of the options will change.
-Lee
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Typically, a put option will increase in price when the underlying stock goes down. But, certain conditions have to present, as well.
If the put option is very far out-of-the-money (OTM) and has only a few days left before expiration, a drop in the stock price might not affect the put option price at all.
If the stock really drops hard and the implied volatility jumps, then the put option price can really shoot higher. Once again though, this will also depend on how much time is left before expiration. If there's lots of time left, then the put option price can pop.
What, then, causes the price of a put option to increase? You have a few options listed
on your Instant Money Trader where the price of the option you had sold, went UP in
price, causing a loss on the close date. Thank you.