a recent trade on ICPT, something doesn't make sense to me.....

miked31

Newbie
8 0
I am having some trouble understanding the way the price of certain strikes reacted to the drop in price on ticker ICPT back from March 23, 2014 to April 18,2014 . This is a Bear Call spread trade ( credit )

Here's how the scenario played out ( I have attached 2 charts, that show each of the 4 weeks strikes, and how they played out ),.....

On 3-23-2014 the 610/620 Bear call spread gave me a Net credit of .80 cents
One week later ( on 3-30-2014 ), the stock had dropped in price by $19. Looking at the 610 call on 3-30 , it would have cost $2.45 to buy it back. What I'm trying to understand, is why would it cost so much to buy it back, after such a big drop in the stock?
The 530, 540, 550 and 560 strikes didn't move at all either

On April 6 , and with 11 days to go till expiration, the stock dropped another $27 dollars in price, BUT.... the 610 call that we sold ( when we put on the trade ) didn't even budge again.... it stayed at $2.45 .
But look at the 530 and 540 strikes, Both of this strikes " Finally " dropped in half, and again, the 550 and 560 strikes still didn't budge

on April 12 , the stock had 5 days till expiration and dropped in price another $24, and Finally, the 610 strike dropped in price , and it dropped big time 9 from $2.45 to .02 cents ) , BUT...... the 530 strike went back up in price ( it basically doubled in price, from $2.65 to $4.90 ), The 540 strike didn't move ( it stayed at $2.00 ), the 550 and 560 strikes STILL didn't move ( both stayed at $4.90 ) , and the 610 strike remained unchanged at .02 cents )

on April 18 ( Expiration Day ), everything remained unchanged in price , from the previous week.

What I don't understand, is why the 610 strike would eventually go from $4.90 to .02 , but the 550 and 560 strikes never moved.
there was a $77 drop in the price in the stock, and yet the 550 and 560 didn't move, but the 610 strike did ( and the 610 was more OTM then both the 550 and 560 )


Thanks for everyones help, I'm know I'm missing something, I just can't put my finger on what it is
Maybe there's a Greek I don't fully understand Or maybe there's something I can add to my option chains, that can help me to avoid making trades on these far OTM strikes , that have almost zero chance of moving, no matter how much in price that the stock itself moves

One final thought is, could it be the lack of Volume and O.I. on these various strikes, as to why there was no movement on them ( even at expiration ) ?

thanks much everyone - Michael
 

Attachments

  • ICPT Bear Call spread  #1.png
    ICPT Bear Call spread #1.png
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  • ICPT Bear Call spread  #2.png
    ICPT Bear Call spread #2.png
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WklyOptions

Well-known member
269 24
I am having some trouble understanding the way the price of certain strikes reacted to the drop in price on ticker ICPT back from March 23, 2014 to April 18,2014 . This is a Bear Call spread trade ( credit )

Here's how the scenario played out ( I have attached 2 charts, that show each of the 4 weeks strikes, and how they played out ),.....

On 3-23-2014 the 610/620 Bear call spread gave me a Net credit of .80 cents
One week later ( on 3-30-2014 ), the stock had dropped in price by $19. Looking at the 610 call on 3-30 , it would have cost $2.45 to buy it back. What I'm trying to understand, is why would it cost so much to buy it back, after such a big drop in the stock?
The 530, 540, 550 and 560 strikes didn't move at all either

On April 6 , and with 11 days to go till expiration, the stock dropped another $27 dollars in price, BUT.... the 610 call that we sold ( when we put on the trade ) didn't even budge again.... it stayed at $2.45 .
But look at the 530 and 540 strikes, Both of this strikes " Finally " dropped in half, and again, the 550 and 560 strikes still didn't budge

on April 12 , the stock had 5 days till expiration and dropped in price another $24, and Finally, the 610 strike dropped in price , and it dropped big time 9 from $2.45 to .02 cents ) , BUT...... the 530 strike went back up in price ( it basically doubled in price, from $2.65 to $4.90 ), The 540 strike didn't move ( it stayed at $2.00 ), the 550 and 560 strikes STILL didn't move ( both stayed at $4.90 ) , and the 610 strike remained unchanged at .02 cents )

on April 18 ( Expiration Day ), everything remained unchanged in price , from the previous week.

What I don't understand, is why the 610 strike would eventually go from $4.90 to .02 , but the 550 and 560 strikes never moved.
there was a $77 drop in the price in the stock, and yet the 550 and 560 didn't move, but the 610 strike did ( and the 610 was more OTM then both the 550 and 560 )


Thanks for everyones help, I'm know I'm missing something, I just can't put my finger on what it is
Maybe there's a Greek I don't fully understand Or maybe there's something I can add to my option chains, that can help me to avoid making trades on these far OTM strikes , that have almost zero chance of moving, no matter how much in price that the stock itself moves

One final thought is, could it be the lack of Volume and O.I. on these various strikes, as to why there was no movement on them ( even at expiration ) ?

thanks much everyone - Michael

Hi, MikeD31,

Yes - you are on the right track. The strike is sooooo far out-of-the-money there is not even a bid on the strike. The strike is nearly 100% of the stock price itself!

I would suggest that you also have a column to track Open Int, Volume, if you are constantly dealing in illiquid, extreme far-out-of-the-money strikes.

The bid/ask is refreshed if there is an active trade that has taken place. And of course, also when expiry is approaching.

Just curious - why trade so far OTM? Your position probably would not get favorable spread fill prices.

Regards,

WklyOptions
 
 
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