Joey, your comment will be helpful here… see question above.
What’s being asked here? Is it something about Institute exams?
" if the underlying pays dividends, then it maybe worthwhile to exercise early.". Shouldn’t a premium for the up coming dividend be built into the call? So, what’s the advantage of excercising? Comments?
When you buy the option, the option price accounts for the possibility of early exercise. Everyone knows that early exercise will only happen right before the stock goes ex-dividend. If you buy the option, you are paying for this possibility. If the stars line up correctly and it’s optimal to exercise and you don’t, then youhave paid for an option that was ITM that you didn’t exercise. That’s probably a violation of whatever the CFAI ethical principle is that says don’t be an idiot.
got that thanks…I was thinking that “early” refers to many days before the ex-dividend date, not necessarily on the ex-dividend date. So, if the ex-dividend date is June 20, and today is May 26, there is no advantage in exercising…holding the call is just as good. But, now that you clarified this, it makes sense that you definitely do not want to hold the call past ex-dividend date without wanting to take in the dividend…
Right.
JoeyDVivre Wrote: ------------------------------------------------------- > pepp Wrote: > -------------------------------------------------- > ----- > > Let’s take an example. > > > > Security price 10 > > > > Case a: > > strike price 10, call worth = 0; cuz i can go > into > > the market and buy the stock > > > > Case b: > > strike price 15; call worth = 0 (should be > > negative, but whatever, no one wants to own > this > > call cuz i can go out to the market and buy it) > > > > case c: > > strike price: 5 call worth: 5 + (transaction > cost > > to buy this call) > > > > Case d (maximum a call can be worth) > > strike price: 0 (ie. the right to buy something > > for 0 and be able to sell it at 10) call worth > 10 > > + transaction cost to buy call. > > > > So max value of call = price but less than > price > > cuz there will be some transaction costs. > > pepp -sorry man, but you got this all messed up. > > Case A: Strike = 10 Underlier = 10 > This is an ATM option and is only worth 0 at > expiration. Prior to expiration it might be very > valuable as it gives you the possibility tobuy > something at 10 that might go to 100 or 1 > billion. > > Case B: Ditto except this is an OTM option which > willbe less valuable than an ATM optionof the same > tenor. > > Case C: worth = 5 + time value. Joey, In my analysis, i assumed today is the expiration date, and the time value is 0.