Isn't the following FAQ-Answer, as well the question itself, total BS? This is from the FAQ of OIC (Options Industry Council) at http://www.optionseducation.org/content/oic/en/tools/faq/technical_information.html " Q: I am perplexed when the option premium disappears from my options. I paid $6.40 for a 20 strike call with two years until expiration when the stock was trading at $20 per share. Now the stock is above $50, but the premium has totally disappeared. The option still has 18 months to expiration and I don’t understand why the premium went away so quickly. It seems like I lost $6.40 somewhere. A: What you have described is the phenomenon of Delta. We define Delta as the ratio of the theoretical price change of the option to the price change of the underlying stock. The rule of thumb is that an at-the-money option has a Delta of approximately .50. Since your call option was right at-the-money when you bought it, for each $1 that the stock went up, your option increased by $0.50. As the stock continued to increase, so did the value of the option, but at a slower rate than the stock. At some point, the Delta of your option approached 1.00 and it began to move at the same rate as the stock. However, during that time, the movement of the stock outpaced that of the option by $6.40, the amount of your premium. If the stock fell back toward $20, the process would reverse itself and you would see some time value premium reappear. "
It's not incorrect, but not a great explanation. The OIC is not talking to a professional so they respond like they are talking to an 8th grader.
What do you think, I'm sure you have an options calculator, is the options worth in the given example?
I might have missed it, but I don't see where it says what the current price is, just that the premium over party is gone. Basically, the person asking the question expected that with the option 30 points in the money, the option should be worth $36.40, maintaining the $6.40 premium. In reality, it is likely that it is closer to 30 then 36.40.
BTW, I can't calculate this without knowing if the stock is hard to borrow and if they pay dividends. I don't think it's important to guess at this for this answer.
Yeah, I'm getting a premium of $31.02, using a fixed historical volatility of 58.4% and r=0 He says "current price is now above 50", but we can just take 50. That FAQ item is totally misleading, IMO even wrong.
I don't think the exact figures are what matter here. They're making a point about premium and heavily ITM delta 1 options.
How much is the leap Put trading for at the 20 strike? That is your answer. Come on guys, put/call parity.
Theoretically it should be something around $1, in my calc using the said Black-Scholes params it is $1.02.
The problem of understanding that FAQ item arises when one differentiates between the "price" of the option and the "premium" of the option. In real world both should be the same thing, then no such problems would happen. The said options are at least $30 deep in the money (ITM), so they are worth at least $30, ie. the premium = price in the market is at least $30, and not with "premium totally disappeared". This shows to me again that the options Greeks (Delta here) are useless in real world. I never liked or needed any of the options Greeks.