David, It almost always has this discrepancy when you are right on a put stock. The reasoning is simple. People who buy options, puts or calls, are trying to leverage their bets. Once you go in the money, the pure premium starts to disappear rapidly and the option price starts to edge toward the intrinsic value. This is more true for puts than for stocks, for the following reason: With a long call, the synthetic position is to buy the stock and buy a put. Stocks currently pay little or no dividend, so putting up 26 and change to buy MU, which pays NO dividend, and then buy a put, is throwing a lot of money inot the pot with no current income. The long call is much more attractive much longer in a rise, as you can continue to hold cash equivalents and receive interest on them and their is no across the street for income on that money in that position. With the put, the synthetic alternative is to short the stock and buy a call, and there is an interest rebate on short stocks for important traders. This makes intrinsic value in puts more of a burden. As it grows larger, the incentive is to liberate that cash and take on the income paying synthetic position or to roll to a lower strike.
Thus, as a put goes in the money, traders will not pay much in the way of pure premium and they are eager to buy the lower cost next strike price down to reduce cash outlay. It is also true with long calls, but it is a much slower process. The collapse of pure put premium is one reason why credit put spreads,(short the 30s, long the 25s, in this example), which are bullish, perform so well so often and so quickly. When I am right I make money and when I am wrong, if that were ever to occur <vbg>, I wouldn't be punished much because of this process of sucking pure premium out of the put I am short and pumping it up in the one I am long.
Hope this isn't too convoluted, but the reasoning is correct even if my prose is obtuse. <G>
MB |
