uTrade AlgosOption prices are influenced by several factors beyond the movement of the underlying stock. Even if the stock moves as anticipated, option prices may not always follow the expected trajectory due to various reasons. Here’s why this discrepancy can occur:
Impact of Volatility
Options pricing is significantly affected by volatility. If the implied volatility of the underlying stock changes, it can alter option prices independently of the stock’s movement.
For instance, an increase in volatility generally raises option premiums, while a decrease lowers them. Even if the stock price moves as predicted, a sudden change in volatility can cause the option price to behave unexpectedly.
Effect of Time Decay
Time decay, or Theta, refers to the reduction in an option’s value as it approaches its expiration date. This effect can cause option prices to move differently than expected, especially if there is limited time remaining before expiration.
As expiration nears, the time value of the option decreases, impacting the option’s price even if the underlying stock performs as forecasted. Share India offers resources to help investors track time decay and its impact on option pricing.
Market Conditions
Broader market conditions and liquidity can also affect option prices. In volatile or illiquid markets, option prices may not move in tandem with the underlying stock due to fluctuations in market sentiment and liquidity constraints.
Factors like economic news, geopolitical events, or changes in market sentiment can cause deviations in option pricing from what is expected based on the stock’s movement.
Supply and Demand
The balance of supply and demand for specific options can impact their prices. If there is high demand for a particular strike price or expiration date, its premium might increase, regardless of the stock’s movement. Conversely, lower demand can suppress option prices.