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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: Theophile who wrote (1483)	1/24/2000 10:11:00 PM
From: rkral	Read Replies (1) \| Respond to of 8096

Where to start? <<The graph on pg 11 [of McMillan's OSI]indicates the intrinsic value is held to a lower limit of 0.00 (at the strike) and further decrease in option price is attributable solely to decrease in time value. I feel this is incorrect.>> The intrinsic value of a call option is DEFINED: (1) to be zero, if the stock price is less than or equal to the strike price, or (2) to be the stock price minus the strike price, if the stock price is greater than the strike price. This definition has nothing to do with the Black-Scholes or any other mathematical model. To reiterate, with the stock price at or below the strike price, the intrinsic value of the call option is zero .. aught .. nothing. <<I would say the error is in limiting the intrinsic value, not allowing it go negative>> Per the above, the intrinsic value can never be negative. You cannot find anyone to pay you to accept the right to exercise a call option, can you? <<How can time value change if the date remains the same?>> The time value will increase with an increase in the volatility of the stock .. real or perceived volatility. Market forces may also temporarily assign an incorrect value to the "time value". You didn't mention volatility in your post. Perhaps it is the missing link in your understanding. You've got a good book with McMillan OSI .. read when you find the time. Hope this helps. Ron