Continue reading...In this article, I will address one of the questions that I have recently been asked. It is on the topic of huge swings in the implied volatility on an individual stock. In order to get to the bottom of the issue under discussion, I have utilized the CBOE’s Option Calculator. Here is the question that I was asked:
I own a biotech stock that is currently trading around $50 and I have recently sold some 55 strike covered calls with the expiration next month. The very next day, out of nowhere, positive news came out and the stock jumped $3. However, the value of the option fell by nearly 30%. How can that be?
The simple answer to your question is that the implied volatility decreased, which in turn has caused the premium of your 55 call to decrease as well. I am glad that the price did not rally above your sold 55 call, which could still happen. There is a possibility that within the next month or so, your stock could lift an additional two points which would then make...
Last edited by a moderator: