21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
When comparing Exhibit 4.5 to Exhibit 4.3 , it’s easy to see that as the
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time value of the option declines, so does Kim’s exposure to vega. As time
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passes, vega gets smaller. And as the call becomes more in- or out-of-the-
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money, vega gets smaller. Since she plans to hold the position for around
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three weeks, she is not concerned about small fluctuations in IV in the
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interim.
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If indeed the rise in price that Kim anticipates comes to pass, vega
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becomes even less of a concern. With 23 days to expiration and DIS at $37,
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the call value is 2.21. The vega is $0.018. If IV decreases as the stock price
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rises—a common occurrence—the adverse effect of vega will be minimal.
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Even if IV declines by 5 points, to a historically low IV for DIS, the call
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loses less than $0.10. That’s less than 5 percent of the new value of the
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option.
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If dividend policy changes or the interest rate changes, the value of Kim’s
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call will be affected as well. Dividends are often fairly predictable.
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However, a large unexpected dividend payment can have a significant
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adverse impact on the value of the call. For example, if a surprise $3
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dividend were announced, owning the stock would become greatly
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preferable to owning the call. This preference would be reflected in the call
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premium. This is a scenario that an experienced trader like Kim will realize
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is a possibility, although not a probability. Although she knows it can |