63 lines
2.1 KiB
Plaintext
63 lines
2.1 KiB
Plaintext
Chapter 1: Definitions 11
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When a call has time remaining to its expiration date, its total price consists of
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its intrinsic value plus its time value premium. The resultant call option price curve
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takes the form of an inverted arch that stretches along the stock price axis. If one
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plots the data from Table 1-4 on the grid supplied in Figure 1-2, the curve assumes
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two characteristics:
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1. The time value premium ( the shaded area) is greatest when the stock price and
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the striking price are the same.
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2. When the stock price is far above or far below the striking price (near the ends
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of the curve), the option sells for nearly its intrinsic value. As a result, the curve
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nearly touches the intrinsic value line at either end. [Figure 1-2 thus shows both
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the intrinsic value and the option price curve.]
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This curve, however, shows only how one might expect the XYZ July 50 call
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prices to behave with 6 months remaining until expiration. As the time to expiration
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grows shorter, the arched line drops lower and lower, until, on the final day in the life
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of the option, it merges completely with the intrinsic value line. In other words, the
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call is worth only its intrinsic value at expiration. Examine Figure 1-3, which depicts
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three separate XYZ calls. At any given stock price (a fixed point on the stock price
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scale), the longest-term call sells for the highest price and the nearest-term call sells
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for the lowest price. At the striking price, the actual differences in the three option
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prices are the greatest. Near either end of the scale, the three curves are much clos
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er together, indicating that the actual price differences from one option to another
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are small. For a given stock price, therefore, option prices decrease as the expiration
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date approaches.
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TABLE 1-4.
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The prices of a hypothetical July 50 call with 6 months of time
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remaining, plotted in Figure 1-2.
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XYZ Stock Price
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(Horizontal Axis)
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40
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45
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48
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➔SO
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52
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55
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60
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XYZ July 50
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Call Price
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(Vertical Axis)
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2
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3
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4
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5
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61/2
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11
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Intrinsic
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Value
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0
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0
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0
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0
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2
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5
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10
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Time Value
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Premium
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(Shading)
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2
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3
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4
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3
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11/2
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1 |