Euro Vs Amer Call Bond exercise, stocks, paying, about

mdfb79

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?

giants2010

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.

jacksparrow

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.

busterbluth

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.

RMontgomery

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.

eoin

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.

ningning1984

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?

cv4cfa

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?

random_walker47

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...

troymo

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.