Options: Why I lost money being right
A trader buys a Call before earnings. The stock rises. They still lose. Understand why — step by step.
Thursday evening, before NVIDIA earnings.
Your trader friend calls:
"NVIDIA reports earnings tonight. I'm sure it'll go up. I bought an ATM Call at 30 days for €12. The underlying is at €100. Implied volatility went from 30% to 55% this week due to earnings anticipation."
Friday morning: NVIDIA announces record earnings. Stock rises 5% to €105. Your friend opens their portfolio... and the Call is only worth €10.50. They lost €1.50 even though the stock rose €5.
Let's analyze what happened.
Step 1. Before earnings, the Call was worth €12 with 55% implied vol. How much of this premium is "time value" inflated by volatility? (Call is ATM: S=K=100€, so intrinsic value = 0)