At Reading 63, top of page 103 there is a sentece saying:
“A call is a means of buying the underlying. It would not make sense to pay more for the right to buy the underlying than the value of the underlying itself.”
I am having a hard time conceptualizing this one. Granted we are talking about theoretical upper bounds and not realistic senarios, why should there even be an upper bound based on the quote above? I find two issues with this reasoning :
A call, as I see it, is not a “means of buying the underlying” but “a means of buying the future underlying” which is by itself a different underlying. (it has an unknown value with a domain of [0, +inf) )
Why does it not make sense to pay more for the right to buy it than the current value of the underlying - at least in theory? Let’s say that a trader has good reasons to believe that an asset will rise x times its current value within a time period. Why wouldn’t he pay an inflated price to get hold of a buying right? Even if the right itself is more expensive than the exercise price, as long as the expected value of (Future Value) - Exercise price - Call Price > 0
I simply cannot see how the quoted sentence (by itself) contains enough evidence for this upper bound.
Sorry for the English, I hope this is clear!