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iShares Russell 2000 Message Board

  • helen.bach helen.bach Feb 15, 2011 6:06 PM Flag

    Question About IWM Options

    IWM was down .57% today (Tuesday), and the bid for my January 2012 IWM $80 put options declined by 1.6%.

    On days when IWM is up, I lose lots of money.

    On days when IWM is down, I lose modest amounts of money.

    Can someone explain this?

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    • Robert Prechter said that in-the-money put options with expiration dates a year or more away are the best kind of options to buy when the market is over-valued (which he thinks the current market is).

      I was told that the time decay on long-dated options is very minimal in the front months but rapid as the options approach the expiration date.

      IWM was down .7% yesterday (Thursday), and the bid for my January 2012 $80 IWM puts declined by 8%.

      I paid $10.25 for these options, and the bid for them is now approx. $6.70, so I've lost 35% of my money in less than eight weeks, even though IWM is only up about 5% over that period of time.

      IWM isn't really thinly traded - most people would consider stocks which have an average daily volume of 46 million shares to be very heavily traded.

      Options dated eleven months away might seem far out in time, but there are also options on IWM which are dated two years out.

      Isn't it likely that things will turn around one of these days and my that options will become more in demand and not so thinly traded?

      • 1 Reply to helen.bach
      • thin trading is not your issue. things can always change, the underlying russell 2000 price is not the only driver of option prices, i mentioned time decay earlier, but volatility also moves option prices. Again, i strongly encourage you to take some swimming lessons before jumping into the ocean. Options can be used to hedge positions you might already own or are "invested" in, options themselves although i trade them, are not long term investments, they are gambles.

    • OK, I've gotta say that if you have a lot of anxiety over your position or maybe have trouble sleeping at night because of being in a losing position that you can't or don't want to afford, maybe, just maybe options aren't really your game.
      If it were me, I'd determine a level that I would be willing to lose for a CHANCE at a reasonable gain and set a sell stop at that level. If I lose, I can move on to the next trade or setup.
      At any rate, I'd certainly be very, very careful about seeking advice from a yahoo message board.

    • options loose money over time if they dont get to the strike price. You should really spend some time learning about options before you trade them, check out thinkorswim, you dont need an account to learn about how they work.

    • When you were approved for option trading you were given an Option Risk Disclosure statement. Read it!!!

      You will lose all of your money very soon if you dont understand the game you are playing.

    • BUP:

      Thanks for responding.

      I was told that a stock or ETF which trades 5 million or more shares per day is considered "heavily traded".

      The average daily volume of IWM shares traded is 46 million, but for some reason no one seems to be buying or selling the the January 2012 IWM $80 put options.

      I don't have any hedges or long positions or straddles, etc.

      If I continue to hold these options, will they become more liquid so that I can recover my losses?

      I bought them on December 27th (about seven weeks ago) for $10.25.

    • My take on this is that you bought options on a relatively thinly traded etf. The option volume is typically a lot lower on IWM than on a popular stock or large etf, therefore, it's a lot easier for a large writer to have a significant advantage over an option buyer.
      Typically, the largest volume of options purchases are from traders who are looking to hedge a long or short position or who are trading spreads, straddles, strangles, etc. Each of those types of more complex options strategies are used when one has a particular hypothesis on what the underlying stock is likely to do in a given time period.
      To just take a simple long or short position without having a trailing stop or some type of hedging is, as you seem to be experiencing, rather risky.

 
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