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iShares Russell 2000 Message Board

  • helen.bach helen.bach Jan 28, 2011 7:14 PM Flag

    Warning: IWM Options

    I bought January 2012 IWM $80 put options on December 27th (a month ago).

    IWM was selling for $79 per share at that time, and I paid $10.25 for the options.

    IWM is now selling for $77.41, and the bid price for my options is $9.75.

    IWM has declined 2% in value, and my put options are now woth 5% less than I paid for them.

    Had I shorted IWM, I would be up 2%, instead of down 5%.

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    • I've seen it happen before going from the low 80's too the upper 60's.The option is so far away from expiring that no one can possibly predict what the price will be.Personally,when I buy put options on this I only go out three to five weeks when this goes to the low 80's.When the market turns bearish this will drop much faster than the other indexes.

    • IWM was down .18% today, and my January 2012 IWM put options declined in value by 6.5%.

      Can someone explain why I lost so much money on a day when the price of IWM was practically unchanged?

      • 1 Reply to helen.bach
      • This has nothing to do with IWM options in particular, I traded an IWM spread last week and it was pretty liquid.

        your positions at the money meaning every single cent of your cost basis is buying volatility and time, you have $0 of intrinsic value in an at or out of the money position.

        on a day to day basis, your position will by definition lose money until there's a convincing move in the direction you're betting on. Hopefully by that time its not too late and you can cash in a nice profit

        it sounds like you're more interested in a leveraged short position. What you want to do is sell out of the money call spreads (or buy in the money put spreads, doing either of these trades around the money would also work but be more aggressive) - this way you're playing by the houses rules and your position will go up in value as time goes by (unless the market moves against you in which case you're screwed either way)

    • Where are you getting the 50s/60s target from?

      IWM can certainly go down.
      In fact 80 seems like a resistance and i wouldn't be surprised to see 75 in a couple of weeks.

      So, yes patience. If you bought a long term put, wait longer for it to mature.

      If IWM breaks out above 81/82, i would sell it at a loss and buy again later.

    • Thanks Urmer, Pobo, and Rwebby for responding.

      My put options were dated thirteen months out when I bought them less than six weeks ago for $10.25, and the bid for them is now $8.62.

      IWM was selling for $79 when I bought the options, and IWM closed at $79.75 today (Tuesday).

      Although IWM has gained only 1%, my options are now worth roughly seventeen percent less than I paid for them.

      My understanding was that long-dated options decay very slowly in the early months and rapidly in the late months as they approach the expiration date.

      It doesn't seem right that my options have declined so much in value in less than six weeks when the expiration date is almost a full year away.

      Any further thoughts or ideas will be appreciated.

      Thanks again!

    • You could also buy TWM (double inverse of the russell 2000) or TZA (triple inverse of the russell). These ETF's rebalance daily based on how the Russel trades, so if the Russell declines 1%, TWM goes up 2% and TZA goes up 3%. Their values do decay's over time similar to options but not as quickly.

      Another thought is to sell some Jan 2012 puts below the $80 strike price you bought to recoup some of of the premium you paid for your $80's. Your profits would be capped by the delta between the $80's you bought and the strike price you sold. If we get a nice hit to the Russell and a spike in volatility, you may be able to get close to the $10 you paid and have some upside.

    • Some of the price has to do with time decay. You have had it for over a month. If there was any shrinkage in volatility from the time you bought it and now, then that would affect the price as well.

      I would be a tad more patient simply based on the fact that a player stepped up to the plate with about 1/2 an hour left to go in Friday's session and at the moment is on your side since he/she purchased 23000 IWM March 66 puts for .63.

      A tad under $1.5 million commitment -- a big ticket item.

      I see it is frustrating since it has rarely exceeded your purchase price in the past month and when it has done so the high price has only been 16¢ more than what you paid.

      • 1 Reply to urmerchant
      • Is there a way to check how high volatility is and whether it's increasing or decreasing?

        Is there a way to tell when you're buying a put that volatility is high and that, therefore, you might be paying a high price for the option?

        Also, I've been getting information about the bid price on a day-to-day basis, but is there a way to check the history of these prices?

        Another thing which I don't understand is that it appears like there is little-to-no buying or selling of the January 2012 $80 put options, yet the bid/ask prices change significantly from one day to the next - i.e. the "last" price often remains unchanged, even though the bid and ask prices move up and down quite a bit in spite of this, and I don't understand how or why that happens.

        Thanks for taking the time to respond!

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