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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)
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To: RealTime who wrote (1482)7/7/1999 6:40:00 PM
From: Madpinto  Read Replies (2) of 2241
 
I can definitely see how confusing this can be. The options should never have a value less than parity. (Parity equals the stock price minus the strike price and can never go below zero.) When the volatility decreases, it only effects the risk premium of the option. (The risk premium is the amount over parity.) So let's say ARQL goes to $25 and you have the 5 strike calls. The premium will go down (probably to zero), but the market would value the calls at about $20. The decrease in risk or the additional supply of options only changes the amount investors will pay above parity (or the entire amount of the option if it is out of the money.) The more in the money the option becomes, the more it moves one to one with the stock. As for the second part of your question, it almost never makes sense to exercise the call option before expiration. The calls (plus the strike)should always trade higher than the stock. In situations where the calls trade under parity, a better strategy could be to sell the stock short. Then if the stock dips below the strike, you can buy the stock back and still have the call. This is not a recommendation, just a possibility. I hope this helps.
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