Why do stock options go down even though they are in the money?

Question

Why do stock options go down even though they are in the money?

Answer 1

b/c the intrinsic value went down, but not enough to get out of the money.

like say you have a call option on Nike, with a strike price of $10, and a current stock price of $20.   say the call is worth $2.50.   depending on the delta, say Nike's stock price goes down to $17.   thta's still in the money, but thecall option would still go down in value.

this is a very generic example, not accounting for time to maturity, etc.

Answer 2

The price of a stock option depends upon the following variables:

The type of option (put or call)

The type of settlement (American or European)

The strike price

The stock price

The amount of stock dividends expected before expiration

The implied volatility of the option

The amount of time before expiration

The risk-free interest rate

Obviously some of those variables change. The amount of time until expiration changes continuously which, absent any other changes, will lower the price of options. That is true for all options, including in the money options.

When there is a rapid large change in the price of an option without a big change in the price of the stock, the reason is almost always a big change in implied volatility. (Implied volatility is essentially the amount of volatility expected in the stock price prior to expiration.) Implied volatility typically drops dramatically for shorter term options when a "big" scheduled event occurs. The event could be an earnings report, a new drug ruling from the FDA, etc.