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+Chapter 37: How Volatility Affects Popular Strategies 765 
+So now one has the idea of how the excess value is affected by the "big three" 
+of stock price movement, change in implied volatility, and passage of time. How can 
+one use this to his advantage? First of all, one can see that an option's excess value 
+may be due much more to the potential volatility of the underlying stock, and there­
+fore to the option's implied volatility, than to time. 
+As a result of the above information regarding excess value, one shouldn't think 
+that he can easily go around selling what appear to be options with a lot of excess 
+value and then expect time to bring in the profits for him. In fact, there may be a lot 
+of volatility both actual and implied - keeping that excess value nearly intact for a 
+fairly long period of time. In fact, in the coming chapters on volatility estimation, it 
+will be shown that option buyers have a much better chance of success than conven­
+tional wisdom has maintained. 
+VOLATILITY AND THE PUT OPTION 
+While it is obvious that an increase in implied volatility ½ill increase the price of a put 
+option, much as was shown for a call option in. the preceding discussion, there are 
+certain differences between a put and a call, so a little review of the put option itself 
+may be useful. A put option tends to lose its premium fairly quickly as it becomes an 
+in-the-money option. This is due to the realities of conversion arbitrage. In a con­
+version arbitrage, an arbitrageur or market-maker buys stock and buys the put, while 
+selling the call. If he carries the position to expiration, he will have to pay carrying 
+costs on the debit incurred to establish the position. Furthermore, he would earn any 
+dividends that might be paid while he holds the position. This information was pre­
+sented in a slightly different form in the chapter on arbitrage, but it is recounted 
+here: 
+In a perfect world, all option prices would be so accurate that there would be 
+no profit available from a conversion. That is, the following equation (1) would apply: 
+(1) Call price+ Strike price - Stock price - Put price+ Dividend- Carrying cost= 0 
+where carrying cost = strike price/ (1 + r)t 
+t = time to expiration 
+r = interest rate 
+Now, it is also known that the time value premium of a put is the amount by which 
+its value exceeds intrinsic value. The intrinsic value of an in-the-money put option is 
+merely the difference between the strike price and the stock price. Hence, one can 
+write the following equation (2) for the time value premium (TVP) of an in-the­
+money put option: