When comparing Exhibit 4.5 to Exhibit 4.3 , it’s easy to see that as the
time value of the option declines, so does Kim’s exposure to vega. As time
passes, vega gets smaller. And as the call becomes more in- or out-of-the-
money, vega gets smaller. Since she plans to hold the position for around
three weeks, she is not concerned about small fluctuations in IV in the
interim.
If indeed the rise in price that Kim anticipates comes to pass, vega
becomes even less of a concern. With 23 days to expiration and DIS at $37,
the call value is 2.21. The vega is $0.018. If IV decreases as the stock price
rises—a common occurrence—the adverse effect of vega will be minimal.
Even if IV declines by 5 points, to a historically low IV for DIS, the call
loses less than $0.10. That’s less than 5 percent of the new value of the
option.
If dividend policy changes or the interest rate changes, the value of Kim’s
call will be affected as well. Dividends are often fairly predictable.
However, a large unexpected dividend payment can have a significant
adverse impact on the value of the call. For example, if a surprise $3
dividend were announced, owning the stock would become greatly
preferable to owning the call. This preference would be reflected in the call
premium. This is a scenario that an experienced trader like Kim will realize
is a possibility, although not a probability. Although she knows it can