标题: Euro Vs Amer Call Bond [打印本页] 作者: mdfb79 时间: 2011-7-11 19:50 标题: Euro Vs Amer Call Bond
The possibility of early exercise is not valuable for a call options on non-dividend paying stocks. Can anyone elaborate, also What about put options?作者: Analyze_This 时间: 2011-7-11 19:50
CFAI Vol 6 page 177. They relate this tough concept to renewing a subscription before the original one runs out. Not only to you lose the interest on the money, you lose the choice.作者: mp3bu 时间: 2011-7-11 19:50
I think its pretty stupid, surely having the option to excercise early would be valuable with or without a dividend yield, even for pure liquidity reasons.
But I think the idea was that you could call it before the stock goes ex-dividend, and the price falls作者: wilslm 时间: 2011-7-11 19:50
The idea is that you could exercise early with the American Option and reinvest the dollars. Because there is no cash flow you cannot do this.作者: spreads 时间: 2011-7-11 19:50
Thanks Chuck.
Chuckrox8 Wrote:
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> The idea is that you could exercise early with the
> American Option and reinvest the dollars. Because
> there is no cash flow you cannot do this.作者: WarrenB1 时间: 2011-7-11 19:50
pedpenny Wrote:
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> I think its pretty stupid, surely having the
> option to excercise early would be valuable with
> or without a dividend yield, even for pure
> liquidity reasons.
It's not stupid.
Think about what actually happens when you exercise an option on a stock prior to expiration. You exercise the call and you get the underlying. The stock you now own is still exposed to price fluctuations between now and expiration date and you just screwed yourself by deciding whether or not you want the stock earlier than when had to decide. Of course you can exercise and just sell the stock immediately but why not just sell the option or close out of the option? You're better off selling the option when you've made money on it vs exercising it way ahead of expiration.
Since you're better off just selling the option it ends up being the exact same thing as holding a European option.
The reason why this may not work out in real life is because of commissions, transaction fees and matching up order sizes; you won't be able to close out of a losing 10,000 contract position the day before expiration at a justifiable cost when you're paying commissions of $1 per contract. It has nothing to do with whether the market adjusts its prices as stated above.
Edited 2 time(s). Last edit at Wednesday, May 11, 2011 at 03:21PM by verse214.作者: ryanlb 时间: 2011-7-11 19:50
. Im arguing over the value of excercising early with regard the dividend yield, lets say its in the money (lets face it you are not going to excercise if its out of the money just for a dividend, unless the dividend is very big and offsets your loss) and you excercise to get the upcoming dividend which you can re-invest as chuck said, so you own the stock and you get the dividend, now do they hold onto the stock after the get the div or do they sell the stock aswell and reinvest that?
Now lets say its a non-dividend paying stock, but its in the money, and you excercise and sell the stock after, and reinvest that, is that not the same objective as reinvesting the dividend.
My other point was lets say I had a sudden liquidity shortage, and I needed cash real bad, and I owned 100 options on a stock that was in the money, being american I excercise the option... yes as im writing this I get your point on just selling the option, for the cash, so it wont matter if it is euro or american作者: Pegasus2008 时间: 2011-7-11 19:50
ohai Wrote:
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> If you hold the option, you don't receive the
> dividend. So tomorrow, all you will have is the
> option to buy the $95 stock for $0. So, your value
> is $95. Obviously, first scenario is superior in
> value.
In your senario, the options exchange would adjust the price of the option to include a cash component, something that commonly happens... check out some option quotes and you'll see sometimes odd option series published for this and other similar reasons. You gain nothing by exercising early, except for some possible liquidity and transaction cost purposes.作者: RepoToronto 时间: 2011-7-11 19:50
Dreary Wrote:
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> In the real world, this is complete nonesense.
> Markets adjust the price of options whose
> underlying has a dividend coming up. You gain
> nothing by exercising and thinking you get the
> dividend. No such thing as a free lunch, CFAI.
That just means you are indifferent to early exercise or selling the option. There clearly exist options that need to be exercised early. For example, suppose you have an option on a $5 stock with a $5 dividend with a strike of $3. Whoever owns that option needs to exercise and get the dividend.作者: comp_sci_kid 时间: 2011-7-11 19:50
The original question asks why there is no benefit to early exercise on stocks with no dividends.
its vwry simple: the value of my call option will always be greater than just the intrinsic value component because of time value (which diminishes at an increasing rate as we approach expiration).
If we exercise, we just capturing the intrinsic value and we lose out on the time value component.
example: i own a call option with a strike at $10 and the underlying is $12. The value of my option is at LEAST $2 where if i exercise the value is EXACTLY $2 (aside from costs). Further, Ive tied up my capital by exercising.
As far as the put goes, the same logic applies only it also applies to stocks that pay dividends as well.作者: Swanand 时间: 2011-7-11 19:50
nielsendc Wrote:
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> example: i own a call option with a strike at $10
> and the underlying is $12. The value of my option
> is at LEAST $2 where if i exercise the value is
> EXACTLY $2 (aside from costs). Further, Ive tied
> up my capital by exercising.
Sure you will lose if you exercise with plenty of time left for expiration.
Get this though. Let us say the $12.50 strike call is selling for $1. Can you think of a case (real not theoretical) in which the next day, the stock is still trading at $12 but your call is worthless, with still plenty of time before expiration?作者: jarobi04 时间: 2011-7-11 19:50
Equity long short hedge fund managers will almost never exercise a call option that was purchased strictly for exposure to the underlying stock's gains. There's no reason to exercise a call option when there is no cash flow from the stock for the a few of the reasons listed above.作者: troymo 时间: 2011-7-11 19:50
Dreary,
Your example places the call out of the money in which case there is no debate as we would obviously never exercise when we could just buy it at the open market for cheaper.
In the case of a non-divi paying stock, there are approximately zero situations where it is more advantageous to exercise early. Consider the following 2 scenarios:
1) Your option is in the money
A) You want to pocket the profit right away: Selling to close nets more than exercising (with a tiny possible exception of same day substitution near expiry to avoid commissions)
B) You actually want to own the stock: Exercising early vs. later gains nothing since you had the option to own the shares at the strike the entire time, only now you have more capital tied up.
2) Your option is out of the money: There is no debate now because not only does exercising have 0 value, it actually has negative value.
*note: For practical purposes this entire discussion assumes standard delivery, typical trade cost structures, no market impact, etc.作者: scarecrow 时间: 2011-7-11 19:50
Dreary Wrote:
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> Well said, nielsendc.
>
> My question above is not related to dividends or
> execise...just a quiz for the heck of it. The
> question restated is:
>
> Let us say the $12.50 strike call for a
> non-dividend paying stock is selling for $1. Can
> you think of a case (real not theoretical) in
> which the next day, the stock is still trading at
> $12 or more, but your call is worthless, with
> still plenty of time before expiration?
Yes: if there are less than 100 shares in the public float.
What is the point of your question作者: ap0258 时间: 2011-7-11 19:50
No if there were less than 100 shares, there would not be calls to issue. The question remains.作者: cv4cfa 时间: 2011-7-11 19:50
Dreary Wrote:
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> No if there were less than 100 shares, there would
> not be calls to issue. The question remains.
Do you know the answer to this question or are you just posing it to complicate things?作者: random_walker47 时间: 2011-7-11 19:50
Dreary Wrote:
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> Well said, nielsendc.
>
> My question above is not related to dividends or
> execise...just a quiz for the heck of it. The
> question restated is:
>
> Let us say the $12.50 strike call for a
> non-dividend paying stock is selling for $1. Can
> you think of a case (real not theoretical) in
> which the next day, the stock is still trading at
> $12 or more, but your call is worthless, with
> still plenty of time before expiration?
There may be a few examples. One obvious one would be if we had zero or close to zero volatility.
Even still, in the context of this thread I don't understand your question. Not that I don't think the mental exercise is valuable, I just feel like I'm missing your point...作者: eoin 时间: 2011-7-11 19:50
Yes I know the answer... I ask it here for the benefit of those who are interested in learning about real life option trading. It could also come up as a question on the exam....afterall, it's an option pricing question.作者: ningning1984 时间: 2011-7-11 19:50
nielsendc Wrote:
> There may be a few examples. One obvious one
> would be if we had zero or close to zero
> volatility.
ok there you go... you do understand the question. But why would volatility drop to zero in real life situations?作者: RMontgomery 时间: 2011-7-11 19:50
I don't see how a stock's volatility could drop to zero within a day's worth of trading (or absence thereof). It depends on the period of time you're using to calculate the vol. If it's an historical 30 day period then I don't see how it could plummet to the point where the option is worth zero in one trading day.作者: giants2010 时间: 2011-7-11 19:50
verse214 Wrote:
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> I don't see how a stock's volatility could drop to
> zero within a day's worth of trading (or absence
> thereof). It depends on the period of time you're
> using to calculate the vol. If it's an historical
> 30 day period then I don't see how it could
> plummet to the point where the option is worth
> zero in one trading day.
Suppose you had a call option on xyz stock, volatility input is 20%, expiration 3 weeks away or so.
Then suppose trading gets halted for late filing/registration or something equally beaurocratic. Implied future volatility would be zero until it started trading again, which would be after the firm met its obligations. In the mean time, if options expiry were to be before the firm is slated to meet those obligations, I can see the option being worthless.作者: jacksparrow 时间: 2011-7-11 19:50
nielsendc Wrote:
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> verse214 Wrote:
> --------------------------------------------------
> -----
> > I don't see how a stock's volatility could drop
> to
> > zero within a day's worth of trading (or
> absence
> > thereof). It depends on the period of time
> you're
> > using to calculate the vol. If it's an
> historical
> > 30 day period then I don't see how it could
> > plummet to the point where the option is worth
> > zero in one trading day.
>
> Suppose you had a call option on xyz stock,
> volatility input is 20%, expiration 3 weeks away
> or so.
>
> Then suppose trading gets halted for late
> filing/registration or something equally
> beaurocratic. Implied future volatility would be
> zero until it started trading again, which would
> be after the firm met its obligations. In the
> mean time, if options expiry were to be before the
> firm is slated to meet those obligations, I can
> see the option being worthless.
In that situation the option would be worthless because no one would buy or sell any options on the stock.
The maximum time period that the SEC can halt trading for regardless of the offense is 10 days; 10 days till expiration is not considered extremely far out. If this were to happen to the 12 dollar stock, the stock would never trade again at 12 dollars and in serious situations the stock would become worthless. Therefore, the option becomes worthless moreso because the stock becomes worthless and not because of the drop in implied volatility. If anything there would be an even bigger drop in the price of the stock after the 10 days runs out.作者: busterbluth 时间: 2011-7-11 19:50
If it halts, there would be no option trading, worthless or otherwise.
Ok, this is as real a situation as it gets because it happened to me! In the above senario of a stock trading at $12, option with a strike of $12.50 trading at $1, then dropping to zero (or near zero) the next day occurs if after closing another company announces its acquisition of the company for $12.50. If it is strongly believed the acquisition will go through, option price drops to zero because volatility drops to almost zero.
