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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)
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To: RealTime who wrote (1479)7/2/1999 12:04:00 PM
From: Madpinto  Read Replies (1) of 2241
 
This makes much more sense to me. You will see this situation quite often when news is expected. The risk associated with selling the options goes up considerably before the news, so the premium associated with the option increases. After the news comes out (and the stock moves), the risk of a big move decreases and the premiums go down. Add to that, the demand for options increases before the news, and the supply increases after it (in the majority of cases.) Think of it like an insurance company. The company sells car insurance for $X. Let's say the insured gets into 3 accidents in a month. The risk goes up and the premium paid may go to $2X. After 3 years of no accidents, the premium might go back to $X. You see this situation with earnings coming out all the time. Try to think of it from the side of the person taking the risk. The seller of the option had to worry about the news doubling the stock (or more!) Mike
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