35 lines
1.8 KiB
Plaintext
35 lines
1.8 KiB
Plaintext
8 Part I: Basic Properties ol Stoclc Options
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If the call is out-of-the-money, then the premium and the time value premium
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are the same.
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Example: With XYZ at 48 and an XYZ July 50 call selling at 2, both the premium and
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the time value premium of the call are 2 points. The call has no intrinsic value by
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itself with the stock price below the striking price.
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An option normally has the largest amount of time value premium when the
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stock price is equal to the striking price. As an option becomes deeply in- or out-of
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the-money, the time value premium shrinks substantially. Table 1-1 illustrates this
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effect. Note that the time value premium increases as the stock nears the striking
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price (50) and then decreases as it draws away from 50.
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Parity. An option is said to be trading at parity with the underlying security if
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it is trading for its intrinsic value. Thus, if XYZ is 48 and the xyz July 45 call is
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selling for 3, the call is at parity. A common practice of particular interest to
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option writers ( as shall be seen later) is to refer to the price of an option by relat
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ing how close it is to parity with the common stock. Thus, the XY2 July 45 call
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is said to be a half-point over parity in any of the cases shown in Table 1-2.
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TABLE 1-1.
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Changes in time value premium.
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XYZ Stock XYZ Jul 50 Intrinsic Time Value
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Price Call Price Value Premium
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40 1/2 0 ¼
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43 1 0 1
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35 2 0 2
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47 4 0 3
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➔50 5 0 5
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53 7 3 4
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55 8 5 3
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57 9 7 2
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60 101/2 10 ¼
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70 191/2 20 -1/20
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asimplistically, a deeply in-the-money call may actually trade at a discount from intrinsic value,
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because call buyers are more interested in less expensive calls that might return better percentage
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profits on an upward move in the stock. This phenomenon is discussed in more detail when arbitrage
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techniques are examined. |