intrinsic value and european options

Discussion in 'Options' started by TraDaToR, Oct 9, 2009.

  1. TraDaToR



    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.
  2. 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"
  3. TraDaToR


    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 ?

  4. TraDaToR


    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...
  5. No, there is no stupid question about options.
    Option rules are built on exceptions. Time value is often somehow just a concept.
  6. TraDaToR


    Thanks MAW