On the Upper Bound of a Call Option
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Can someone help me with this concept? Effectively this is the time-value of the option. Why does this not apply to the American puts? On pageexample-2 part B, it says a 75 Put: The idea is that European Calls mean you can only exercise on the day of expiration while American Calls you can excise prior to the excise date.
However, in most cases most people, even thou they have an American Call, tend to exercise on the date of expiration. Online Videos - Arif Irfanullah https: Never say Die https: I now have 55 — I now have I think about it this way, owning an in the money American put is like being able to sell the underlying for more than the market price, so you can immiediatly make X - S profit if you want.
So this is the minimum price any one would sell it to you. A European Put is the same except that it is the ability is to sell the underlying at time t in the future. Since you are selling it at time t in the future, you have to discount that cash flow by t. But you could buy the underlying immediatly to lock in that profit, so S does not need to be discounted. For calls you would always want the value of the exercise price you are paying to be minimized, so you would want it to be discounted as much as possible.
If expected cash flows of underlying asset are expected to increase will call value go up or down? If the expected cash flows of the underlying increase before the excersise date then the value will go down because the time value of the option will go down.
If expected cash flows increase, say by an increase in dividends, the market will price this new higher cash flow into the call option by decreasing its value. This is because we know that when a dividend goes ex, the stock falls by the amount of the dividend in theory. This has downward pressure on the stock, which reduces the price of call options which, of course become less valuable when the stock price falls. Volatile prices of the underlying instrument can stimulate option demand, enhancing the value.
So if a divided is lowers the probablity of an increase in the spot price, than it is affecting the Time Value of the option. Just know the nature of the relationship. Skip to main content. Be prepared with Kaplan Schweser.
Galli Nov 11th, 3: Effectively this is the time-value of the option Why does this not apply to the American puts? Study for Success in THis is how I remember it. Galli Nov 13th, You just made it click for me. I have doubt Is an euro put with longer duration vs euro put of horter duration? Theoretical lower bound for an in the money European call: Here are some potential outcomes: Theoretical lower bound for in the money European put: Hope this is correct and all makes sense.
Hi If expected cash flows of underlying asset are expected to increase will call value go up or down? Afucfa - the expected cash flows do not have anything to do with time value.