Noobie Options Trader sees stock price jump 30% but only sees 36% profit?

Hello, I'm new to OTF and ordinarily would have made an introduction before posting, but something happened to me today that kind of has me in a rush for some veteran trader assistance.

I'm new to options trading but figured I had a pretty good grasp on how profits are calculated. But yesterday I opened a position in my demo account and today the stock is (or was, it's moving around) up 30% from where I bought it yesterday. My admittedly simplistic understanding of buying call options is that as the underlying stock price increases in value one enjoys profits on the contract by roughly an order of magnitude for every 5% of positive movement, seeing as the price of the contract is 1/10 the price of the stock. It seemed my understanding was sound when I bought Netflix a few weeks back prior to earnings and enjoyed a huge return on it.

Yesterday I bought 2 CHTP March 14 4.00 Call for $360 ($1.80 apiece). Today the current bid when I went to sell to close is $2.45, yielding what feels like a pretty flimsy profit of just $146.

Can someone make some sense of this for me? I'm attaching a screenshot from my Optionshouse demo account with some notations:

democonfuse.jpg

Shouldn't this trade be worth much more? What am I missing? Is it because I bought March 14 options - is time decay that drastic? I had been feeling very good about my understanding of this kind of trading over the last three months - as I've read and tried to absorb as much as possible on this subject. I was even preparing to fund my first live options account later today and now I'm feeling very much like a guy who doesn't know what he's doing.

:confused2:

Hello, Welcome to the forum. Options have two kinds of value...intrinsic and extrinsic. How much you are in the money (ITM) by is the intrinsic. Time value AND volatility influence the extrinsic value. Between the 18th and the 19 there was a volatility contraction. Looking at the news it would apprear that this was due to the resolution of the FDA judgement that was looming. Now that the event is past the volatility will contract to wherever. So you lost a big chunk of value due to the collapse of volatility...a little to theta decay...and a fair amount to the inefficiency of the market of that stock...meaning the bid/ask spread is like .30 wide....you lose that the second you go in.

This is why I prefer to sell options. By limiting your upside you are given the edge lost by those who buy looking for unlimited profit potential.

Quick breakdown of why I sell options and never buy them naked. By buying the option to go long your break-even will be the value of the strike plus what you paid. Then if the implied volatility percentile is high you lose money when it reverts to the mean. Then you lose money with the time decay...and finally there is a slight addition in premium that is paid simply for having potentially unlimited gain (which we know isn't really unlimited as we usually have a place where we will sell). All of these factors are in reverse when you sell an option. When you sell a put to go long you limit your upside and your downside is potentially unlimited (but not really right?) and if you want to limit your downside... simply buy a cheaper option of the same expiration. That is what a spread is. That's just the quick and dirty.

Well, you actually did make 30%. 2.45-1.80= .65/1.80= 36%.

But you only had 2 contracts, that's why lack of dollar profit. The stock would have probably had to go near $9 for you to make 100% off a CHTP 'in the money' $4 call from where you bought it. But hey, profit is profit in this game. Take it and find another trade.

...and I'm not sure what "an order of magnitude for every 5% of positive movement..." means but if you want to see the relationship between stock movement and option pricing just watch your "delta". The delta of an option is how much the option price will change for every dollar change in the underlying.