34 lines
2.5 KiB
Plaintext
34 lines
2.5 KiB
Plaintext
246 Part Ill: Put Option Strategies
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price. On the other hand, if the stock price were above the striking price of the put
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option at expiration, the put would be worthless. No one would logically want to exer
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cise a put option to sell stock at the striking price when he could merely go to the
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open market and sell the stock for a higher price. Thus, as the price of the underly
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ing stock declines, the put becomes more valuable. This is, of course, the opposite of
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a call option's price action.
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The meaning of in-the-money and out-of-the-money are altered when one is
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speaking of put options. A put is considered to be in-the-money when the underlying
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stock is below the striking price of the put option; it is out-of the-money when the
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stock is above the striking price. This, again, is the opposite of the call option. IfXYZ
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is at 45, the XYZ July 50 put is in-the-money and the XYZ July 50 call is out-of-the
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money. However, ifXYZ were at 55, the July 50 put would be out-of-the-money while
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the July 50 call would be in-the-money. The broad definition of an in-the-money
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option as "an option that has intrinsic value" would cover the situation for both puts
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and calls. Note that a put option has intrinsic value when the underlying stock is
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below the striking price of the put. That is, the put has some "real" value when the
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stock is below the striking price.
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The intrinsic value of an in-the-money put is merely the difference between
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the striking price and the stock price. Since the put is an option (to sell), it will gen
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erally sell for more than its intrinsic value when there is time remaining until the
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expiration date. This excess value over its intrinsic value is referred to as the time
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value premium, just as is the case with calls.
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Example: XYZ is at 47 and the XYZ July 50 put is selling for 5, the intrinsic value is
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3 points (50- 47), so the time value premium must be 2 points. The time value pre
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mium of an in-the-money put option can always be quickly computed by the follow
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ing formula:
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Time value premium p . S k · St "ki · • ) == ut option + toe pnce - n ng pnce (m-the-money put
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This is not the same formula that was applied to in-the-money call options, although
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it is always true that the time value premium of an option is the excess value over
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intrinsic value.
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Time value premium Call ti S ·ki · St k · . all == op on + tn ng pnce - oc pnce (m-the-money c )
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If the put is out-of-the-money, the entire premium of the put is composed of time
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value premium, for the intrinsic value of an out-of-the-money option is always zero. |