In a meltdown scenario, the 650 put should acquire a lot of "extrinsic value" as a result of a big increase in implied volatility levels. Early exercise would give that value away. Offsetting the position retains that value.
please clarify further? need a little help to fully understand what you're suggesting which BTW makes whole lot of sense. thanks
OK, I finally get it now! I have to think about it some more, but it's an interesting idea. The one thing that bothers me is that the 650 put holder *could* exercise if he wanted to, for some wacky reason of his own. It might be irrational, per your explanation, but there is that exposure. Anyhow, thanks for the suggestion, I'll definitely consider it.
the options you buy or sell are just like futures and are not related to any specific person or are they? it should be irrelevant if the other side wanted to exercise or not...?
Yes, the clearing house is the counterparty, but if someone decides to exercise and you're the one assigned then it does affect you.
TSOX------- The current at-the-money, (715 strike price), Russell put options, have a premium of ~18 points. In a meltdown to ~640, the "new" at-the-money puts could easily be 30, 40 or 50 points, i.e. a huge increase in "extrinsic" value. It would be smart to offset the position and retain that value instead of giving it up via early exercise.
wow... never knew that! BTW, what are the best options from liquidity point of view to trade for hedging ES/ER. I don't think their own options would provide good spreads. A couple of decades ago, I used OEX ones against S&P 500. They were the only ones that were electronically traded back then. What would be their equivalents today?
nazzdack, to help me understand this better, the option must still have a lot of life left on it right? because I used to think that deep in the money(is a 715 put with the index at 640 considered deep in the money?) options have no more extrinsic value and they're worth their intrinsic value only, or not?! p.s. edited: do you ,mean the 30,40 or 50 points in addition to the 75 points intrinsic value?
1) As a rough guideline, deep-in-the-money options have extrinsic value equal to the premium of their deep-out-of-the-money counterpart, i.e. a $600 Russell call has "extrinsic value" equal to the premium of a $600 Russell put. 2) A Russell 715 put, presently "at-the-money", has a premium of 18. In a rapid meltdown to 640, a Russell 640 put, NOW currently at-the-money, can have a premium of 30, 40,or 50 points. The 715 put should have a value of 75 points "intrinsic" and extrinsic value equal to the value of the 715 call.