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+Cl,apter 3: Call Buying 99 
+money call on the same underlying stock, it will most surely move up on any increase 
+in price by the underlying stock. Thus, the short-term trader would profit. 
+THE DELTA 
+The reader should by now be familiar with basic facts concerning call options: The 
+time premium is highest when the stock is at the striking price of the call; it is lowest 
+deep in- or out-of-the-money; option prices do not decay at a linear rate -the time pre­
+mium disappears more rapidly as the option approaches expiration. As a further means 
+of review, the option pricing curve introduced in Chapter 1 is reprinted here. Notice 
+that all the facts listed above can be observed from Figure 3-1. The curves are much 
+nearer the "intrinsic value" line at the ends than they are in the middle, implying that 
+the time value premium is greatest when the stock is at the strike, and is least when 
+the stock moves away from the strike either into- or out-of-the-money. Furthermore, 
+the fact that the curve for the 3-month option lies only about halfway between the 
+intrinsic value line and the curve of the 9-month option implies that the rate of decay 
+of an at- or near-the-money option is not linear. The reader may also want to refer back 
+to the graph of time value premium decay in Chapter 1 (Figure 1-4). 
+There is another property of call options that the buyer should be familiar with, 
+the delta of the option (also called the hedge ratio). Simply stated, the delta of an 
+option is the arrwunt by which the call will increase or decrease in price if the under­
+lying stock moves by 1 point. 
+FIGURE 3-1. 
+Option pricing curve; 3-, 6-, and 9-month calls. 
+Q) 
+0 
+~ 
+C: 
+0 
+a 
+0 
+9-Month Curve 
+6-Month Curve 
+3-Month Curve 
+/ 
+Intrinsic Value 
+Striking Price 
+Stock Price 
+As expiration date draws 
+closer, the lower curve 
+merges with the intrinsic 
+value line. The option 
+price then equals its 
+intrinsic value.