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.