37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
O.,,ter 15: Put Option Basks 247
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The time value premium of a put is largest when the stock is at the striking price of
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the put. As the option becomes deeply in-the-money or deeply out-of-the-money, the
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time value premium will shrink substantially. These statements on the magnitude of
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the time value premium are true for both puts and calls. Table 15-1 will help to illus
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trate the relationship of stock price and option price for both puts and calls. The
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reader may want to refer to Table 1-1, which described the time value premium rela
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tionship for calls. Table 15-1 describes the prices of an XYZ July 50 call option and
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an XYZ July 50 put option.
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Table 15-1 demonstrates several basic facts. As the stock drops, the actual price
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of a call option decreases while the value of the put option increases. Conversely, as
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the stock rises, the call option increases in value and the put option decreases in
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value. Both the put and the call have their maximum time value premium when the
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stock is exactly at the striking price. However, the call will generally sell for rrwre than
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the put when the stock is at the strike. Notice in Table 15-1 that, with XYZ at 50, the
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call is worth 5 points while the put is worth only 4 points. This is true in general,
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except in the case of a stock that pays a large dividend. This phenomenon has to do
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with the cost of carrying stock. More will be said about this effect later. Table 15-1
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also describes an effect of put options that normally holds true: An in-the-rrwney put
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( stock is below strike) loses time value premium rrwre quickly than an in-the-rrwney
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call does. Notice that with XYZ at 43 in Table 15-1, the put is 7 points in-the-money
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and has lost all its time value premium. But when the call is 7 points in-the-money,
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XYZ at 57, the call still has 2 points of time value premium. Again, this is a phenom
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enon that could be affected by the dividend payout of the underlying stock, but is
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true in general.
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PRICING PUT OPTIONS
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The same factors that determine the price of the call option also determine the price
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of the put option: price of the underlying stock, striking price of the option, time
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remaining until expiration, volatility of the underlying stock, dividend rate of the
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underlying stock, and the current risk-free interest rate (Treasury bill rate, for exam
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ple). Market dynamics - supply, demand, and investor psychology - play a part as
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well.
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Without going into as much detail as was shown in Chapter 1, the pricing curve
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of the put option can be developed. Certain facts remain true for the put option as
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they did for the call option. The rate of decay of the put option is not linear; that is,
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the time value premium will decay more rapidly in the weeks immediately preced
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ing expiration. The more volatile the underlying stock, the higher will be the price |