42 lines
1.9 KiB
Plaintext
42 lines
1.9 KiB
Plaintext
170 • The Intelligent Option Investor
|
||
Because investment leverage comes about by changing the amount
|
||
of your own capital that is at risk vis-à-vis the total size of the investment,
|
||
you can imagine that moneyness has a large influence on lambda. Let’s
|
||
take a look at how investment leverage changes for in-the-money (ITM),
|
||
at-the-money (ATM), and out-of-the-money (OTM) options. The stock
|
||
underlying the following options was trading at $31.25 when these data
|
||
were taken, so I’m showing the $29 and $32 strikes as ATM:
|
||
Strike Price K /S Ratio Call Price Delta Lambda
|
||
15.00 0.48 17.30 0.91 1.64
|
||
20.00 0.64 11.50 0.92 2.50 ITM
|
||
21.00 0.67 11.30 0.86 2.38
|
||
22.00 0.70 9.60 0.89 2.90
|
||
…
|
||
…
|
||
…
|
||
…
|
||
…
|
||
29.00 0.93 3.40 0.68 6.25
|
||
30.00 0.96 2.74 0.61 6.96 ATM
|
||
31.00 0.99 2.16 0.54 7.81
|
||
…
|
||
…
|
||
…
|
||
…
|
||
…
|
||
39.00 1.25 0.18 0.09 15.63
|
||
40.00 1.28 0.13 0.06 14.42 OTM
|
||
41.00 1.31 0.09 0.05 17.36
|
||
When an option is deep ITM, as in the case of the $20-strike call, we
|
||
are making a significant expenditure of our own capital compared with
|
||
the size of the investment. Buying a call option struck at $20, we are—
|
||
as explained in the preceding section—effectively borrowing an amount
|
||
equal to the $20 strike price. In addition to this, we are spending $11.50 in
|
||
premium. Of this amount, $11.25 is intrinsic value, and $0.25 is time value.
|
||
We can look at the time value portion as the prepaid interest we discussed
|
||
in the preceding section, and we can even calculate the interest rate im-
|
||
plied by this price (this option had 189 days left before expiration, implying
|
||
an annual interest charge of 2.4 percent, for example). This prepaid interest
|
||
can be offset partially or fully by profit realized on the position, but it can
|
||
never be recaptured so must be considered a sunk cost. Time value always
|
||
decays independent of the price changes of the underlying, so although an |