Hello, Newbie here. Are there cases where an ITM european option cost less than its intrinsic value since it cannot be exercised prior to expiration? Thanks a lot.
Hi, "A simple explanation is that european style options are priced on a forward. Thus, if interest rates are around 10% , spot is 100 and the one year put strike is 200, european option is priced on a forward around 110 (100*(1+10%)) . Hence intrinsic value is 200-100=100 but the one year put value is 200-110=90" http://www.elitetrader.com/vb/showthread.php?s=&threadid=178302
Thanks MasterAtWork, I understand that for stocks, but can it happen in a futures market? Let's say Crude oil Dec 2010 is @ 70 , is it possible for Crude oil Dec 2010 60 european calls to be < 10 for any reason? It cannot happen in american style because of exercice arbitrage, but european ? Thanks.
Is it a stupid question? I know it is an unlikely case because of time value... but I was just wondering if there wasn't exceptions...
No, there is no stupid question about options. Option rules are built on exceptions. Time value is often somehow just a concept.