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+8 Part I: Basic Properties ol Stoclc Options 
+If the call is out-of-the-money, then the premium and the time value premium 
+are the same. 
+Example: With XYZ at 48 and an XYZ July 50 call selling at 2, both the premium and 
+the time value premium of the call are 2 points. The call has no intrinsic value by 
+itself with the stock price below the striking price. 
+An option normally has the largest amount of time value premium when the 
+stock price is equal to the striking price. As an option becomes deeply in- or out-of­
+the-money, the time value premium shrinks substantially. Table 1-1 illustrates this 
+effect. Note that the time value premium increases as the stock nears the striking 
+price (50) and then decreases as it draws away from 50. 
+Parity. An option is said to be trading at parity with the underlying security if 
+it is trading for its intrinsic value. Thus, if XYZ is 48 and the xyz July 45 call is 
+selling for 3, the call is at parity. A common practice of particular interest to 
+option writers ( as shall be seen later) is to refer to the price of an option by relat­
+ing how close it is to parity with the common stock. Thus, the XY2 July 45 call 
+is said to be a half-point over parity in any of the cases shown in Table 1-2. 
+TABLE 1-1. 
+Changes in time value premium. 
+XYZ Stock XYZ Jul 50 Intrinsic Time Value 
+Price Call Price Value Premium 
+40 1/2 0 ¼ 
+43 1 0 1 
+35 2 0 2 
+47 4 0 3 
+➔50 5 0 5 
+53 7 3 4 
+55 8 5 3 
+57 9 7 2 
+60 101/2 10 ¼ 
+70 191/2 20 -1/20 
+asimplistically, a deeply in-the-money call may actually trade at a discount from intrinsic value, 
+because call buyers are more interested in less expensive calls that might return better percentage 
+profits on an upward move in the stock. This phenomenon is discussed in more detail when arbitrage 
+techniques are examined.