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Min of American Put

didnt it say something like PV of intrinsic value…or not give 0 in that answer as well??

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intrinsic value!

i am not so sure but i remember seeing European put in SG. i put 0 i believe.

Fighting to Pass the L2 Exam now

yup … intrinsic value was the answer….

bcoz min value for american put is: max[0, x-s], no present value in american options as it can be exercised any time and for europeans we have wait till maturity thats we take present value of strike price….

so the last 2 were false

about 0, it is only in the case when strike is less than current price, so 0 cannot be determined from the data in the question,

but intrinsic value is max[o,x-s], as option pay off cannot be less than 0 and cannot be higher than x-s bcoz you can sell the stock or whatever underlying in the market… (something like that i dont exactly remember)

so that was it intrinsic value

Intrinsic value can be negative. So 0 is the minimum value a put option can be.

No it can’t. Intrinsic value is the answer for sure and for certain.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

I think I faced the Q for lower bound of call? Did anyone else? Test 3030 and 3131

The lower bound would be either 0 or - (present value of the premium paid in the past while purchasing the put).

The later is not in the answers … and so the max that one would lose with a put is zero which is the answer I guess.

additionally.
the Max he could get is if the stock price goes to zero …entire price of the stock - the PV or the premium…

JoeyDVivre Wrote:
——————————————————-
> No it can’t. Intrinsic value is the answer for
> sure and for certain.

JoeyD if you say the answer is intrinsic value, then I believe it is intrinsic value, which sucks because that means was wrong. But help me out here, my understanding is that intrinsic value of an American put is pretty straight forward, X-S.

So if a stock is trading at 10 and the put excise price is 5, wouldn’t intrinsic value be -5? And that is why the min value of the put is bounded by MAX(0, intrinsic value)? Am I just confusing the terminology here? Is the definition of intrinsic value in this case MAX(0, X-S), not just X-S? Thanks.

This is an option. It gives you the right (but not the obligation) to do something. That right can’t have an intrinsic value less than zero, because in the worst case you do… nothing and you get… nothing.

If I give you the right (but not the obligation) to give me £1,000,000 how much is this position worth to you?

This actually makes a lot of sense. It’s a simple concept and I now feel like an idiot for getting it wrong.

it’s absolutely intrinsic value since the definition for the time value of an option is the difference between the market value and the intrinsic value. so, if the market value is positive, but the option is out of the money, the intrinsic value is zero.

whodey,
Yes it is simple. For an options trader it is very very clear….

all that you lose is 0. But if there is a choice, you could lose the present value of the premium that you paid. Essentially, the premium is the amount lost that you will claim in your tax returns as realized losses.

Here in the 4 options the only relavant option that I found was 0.

BullPow … what if the option is in the money…. do the trader still get 0… ????

nope… he would make profit if the option is in the money right …recollecting that if a put option is in the money the current price of the underlying derivative is less than the Strike Price ….

he would get i.e. his total profits are:

( Strike Price ) - ( Current Stock Price which is less than the Strike Price if the option is in the money ) - ( Premium paid for the Option ).

Now, if one is too picky, and say if it is a long term option (LEAPS), you may have paid some interest on the premium that you paid while purchasing the option…then you may want to use PV of the Premium paid instead of just premium…

BullPow Wrote:
——————————————————-
> whodey,
> Yes it is simple. For an options trader it is very
> very clear….
>
> all that you lose is 0. But if there is a choice,
> you could lose the present value of the premium
> that you paid. Essentially, the premium is the
> amount lost that you will claim in your tax
> returns as realized losses.
>
> Here in the 4 options the only relavant option
> that I found was 0.

So what’s the bet that you are wrong?

Honestly, any options trader should absolutely know that an American put is worth at least its intrinsic value.

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

The question is not about your payoff, it is about the value of the put..assume you didn’t buy the put, what’s the value of the put? It is X-s.

Actually, it is X - s + time value

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

yeah, I didn’t mean the “value”, but the minimum value…that’s the context of the question.
So, the minimum value of an American put is always greater than or equal to strike price - current price (no time value). This statement takes care of negative cases as well, but we get a better answer (i.e., closer answer) by using zero instead of negative values.

Yep

I’m Da Church of the faithful, I’m Liao Fengyi, clergywoman mother should have to introduce you to me, I have seen you twice, in which time you are more impressed with everyone I guess in the back of the church at noon to eat noodle face!

Joey,
Sorry I wasnt clear… and I wouldnt dare to bet with you :)) .. as Dreary was saying it was about min bound value was the context of the question…