IPI and the comparative test

I have a number of option and stock positions in play right now. Overall I am in the green...considering that these are mostly positions taken this week that is not too bad for a three day run in a questionable market.

One test I ran was to enter limit orders this morning for a stock and an option at the same time. I calculated what the option entry price should be based on my trigger price from the stock chart using the various variables for the option and my spreadsheet formulae.

The test subject is Intrepid Potash Inc. (IPI).

The limit orders placed were for $25.50 in the stock and $6.40 for the Jan 20 call option (IFJAT).

Both orders filled quickly off the bell and I might have been able to get slightly better prices for the stock by another 15 cents and 10 cents for the option...but I would probably have sacrificed getting one or the other altogether as the price bottom was hit 3 minutes in. I am satisfied with both entries and happy to see that my estimate of the option price that I calculated from yesterday's EOD numbers was still accurate... and that is the only point for the trade in the first place, profit a close second.


Here is a little chart reflecting some of the numbers for each position.

It is well worth noting that the Extrinsic Value (EV) decreased between 9 and 39 cents (depending on if you use the bid or ask numbers...I would tend toward the bid as that would be the price to sell given a market order...a whole other topic). This drop counterbalances the Intrinsic Value (IV) gain of 69 cents (the increase in stock price) and results in the EOD Delta being lower.

Delta is the expected ratio of stock price movement vs option price movement... initially the 0.823 would mean that if the stock moves $1 then the option price would move 82.3 cents. The IV will always change by the price of the stock, the variable becomes the EX as it is not only a time premium (as it is often referred to) but a volatility expectation premium as well. Higher volatility expectations can yield higher EV values. This is why a flat trading stock that is not expected to move quickly has a very low option EV premium and why some options are very cheap and other can be very expensive even given zero or negative IV.

That's about it for tonight.

Jeff.