766 Part VI: Measuring and Trading Volatility 
(2) Put TVP = Put price - Strike price + Stock price 
The arbitrage equation, (1), can be rewritten as: 
(3) Put price - Strike price+ Stock price= Call price+ Dividends - Carrying cost 
and substituting equation (2) for the terms in equation (3), one arrives at: 
( 4) Put TVP = Call price + Dividends - Carrying cost 
In other words, the time value premium of an in-the-money put is the same as the 
(out-of-the-money) call price, plus any dividends to be ea med until expiration, less 
any carrying costs over that same time period. 
Assuming that the dividend is small or zero (as it is for most stocks), one can see 
that an in-the-money put would lose its time value premium whenever carrying costs 
exceed the value of the out-of-the-money call. Since these carrying costs can be rel­
atively large ( the carrying cost is the interest being paid on the entire debit of the 
position - and that debit is approximately equal to the strike price), they can quickly 
dominate the price of an out-of-the-money call. Hence, the time value premium of 
an in-the-money put disappears rather quickly. 
This is important information for put option buyers, because they must under­
stand that a put won't appreciate in value as much as one might expect, even when 
the stock drops, since the put loses its time value premium quickly. It's even more 
important information for put sellers: A short put is at risk of assignment as soon as 
there is no time value premium left in the put. Thus, a put can be assigned well in 
advance of expiration even a LEAPS put! 
Now, returning to the main topic of how implied volatility affects a position, one 
can ask himself how an increase or decrease in implied volatility would affect equa­
tion ( 4) above. If implied volatility increases, the call price would increase, and if the 
increase were great enough, might impart some time value premium to the put. 
Hence, an increase in implied volatility also may increase the price of a put, but if the 
put is too far in-the-nwney, a modest increase in implied volatility still won't budge 
the put. That is, an increase in implied volatility would increase the value of the call, 
but until it increases enough to be greater than the carrying costs, an in-the-money 
put will remain at parity, and thus a short put would still remain at risk of assignment. 
STRADDLE OR STRANGLE BUYING AND SELLING 
Since owning a straddle involves owning both a put and a call with the same terms, 
it is fairly evident that an increase in implied volatility will be very beneficial for a 
straddle buyer. A sort of double benefit occurs if implied volatility rises, for it will