Tuesday, December 12, 2006

Studying the RIMM Puts

Last Thursday, RIMM Dec06 120 Puts pretty much doubled in value when RIMM dropped down by around 3.0%. Today however, the same RIMM Puts were not moving as much, even though the underlying still dropped almost 2.5%. Now, I think that today's relatively benign movement in the Puts compared with last Thursday is due to Theta, but I'm not confident that that is the complete picture/answer. Perhaps someone could explain/confirm this to me - Is today's lack of a big move in the RUPXD Puts due to Theta, or is there a better explanation ?

There were a couple other things that I noticed, which I am recording here so that I can act upon it the next time this occurs.

a) RIMM's downward move last Thursday was clean and well-behaved. There was no chopping around the opening Range candle. The morning pullback did not violate any resistance levels, and neither did the afternoon pullback. Both pullbacks were on light volume. The selling resumed after each pullback.

b) The 10 candle EMA was never violated - persistend downtrend.

c) RIMM closed near the LoD on increased selling.

d) RIMM formed a weak, intraday double bottom @130. This support level was also broken without too much choppiness.

I was actually watching RIMM for the past few days, but didn't have the presence of mind to work out support/resistance levels and set alerts at key levels. If I had done that, I would have had the presence of mind to purchase some Puts.


Cucca said...

I don't know anything about Theta or RIMM Phileo, but I do know that you had more time premium last week built into the puts, and the voilitility will start to drop radpidly on the front month options as you get within a few days of expiration. No one is going to pay much premium for an option that expires in a few days. Just my thoughts. See Ya.

Phileo said...

Hi Cucca,

Thanks for dropping by to visit!
Yeah, thanks for providing your explanation - it totally makes sense, and I started thinking along those lines this morning.

I see that you've got quite a bit of "meat" in your blog, I'll be sure to check it out.