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

To: rkral who wrote (1694)	1/25/2000 10:02:00 PM
From: Theophile	Respond to of 8096

> what is the first simplest scenario you can think of that "requires" negative intrinsic value.< Thanks for the offer to supply some explanation. The "requirement" would be more for clarity and accurate representation of the following situation, rather than increased profit. XYZjuly50 Call sells for $12 when XYZ is @ $50. XYZ drops to $40 and now, 2 days later with still 6 months to go, the call is selling for $4.50 Intrinsic value was $0 and time value was $12, now the time value is required to absorb the difference in price. For me, knowing something about the stock movement, the time value is still very much worth the $12 for 6 months, however the intrinsic value has degraded to cause a loss in option price. One could look at recent movements in ENE and see a similar picture. <<<<<>>>>> This is just an academic question bringing into perspective the "why" and what-for of attributing all price movement below strike to the time value for a call. NOTE: Today I received the text LEAPS by Roth, and I have only had time to examine the first few pages. On the inside first page is a graph depicting Time Value on the vertical axis, with Time to Expiry on the horizontal axis....this is precisely what I am speaking about, where time value is independent of the share price of the underlying. (in this particular graph there is no third axis depicting share price of the underlying, I have never seen a 3 axis graph to describe what I am trying to explain) IMO: The proper pricing of [time value] would be to use a measure of [share price variability] applied to [remaining time], and a gradient applied to the [difference between current underlying share price and strike]. To simply cut off the portion below the horizontal axis distorts my personal reality as to what the $$ value of time remaining truly is. The price is the price, but the allocation of the elements composing the price is, to me, unrealistic. The graph on the LEAPS text is more illustrative for the time value, however it too is incorrect in just the other direction, it completely ignores the share price of the underlying.... This is a very wordy post, and perhaps unproductive. Purely academic pursuits may not be appropriate for the thread. Reply as you feel inclined. Thanks. Martin Thomas