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.