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Re: Option Premiums


  • To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
  • Subject: Re: Option Premiums
  • From: THE DOCTOR <droex@xxxxxxxxxxxx>
  • Date: Wed, 12 May 1999 23:14:27 -0400 (EDT)
  • In-reply-to: <000c01be9cc0$f8fc70e0$af95b7ce@xxxxxx>

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As any input in an option model approaches infinity the price of the option
goes to the price of the underlying.&nbsp; So in&nbsp; a practical sense
the price of an option could not exceed the price of the underlying.&nbsp;
You create a textbook case where one of the inputs was negative and you
could model a price higher, but it would be a textbook example only.
<P>The other exception would be if some bizarre circumstances existed in
delivering the actual security... if deferred delivery would have some
value other than a simple cash price(such a voting right that might have
some extreme value that would occur at a future date than, again in theory,
you could model a value in excess of the underlying.
<P>From a practical standpoint, no way.&nbsp; From a textbook it doesn't
exist on this planet standpoint .yes it could be simulated.
<P>RAY RAFFURTY wrote:
<BLOCKQUOTE TYPE=CITE><STYLE></STYLE>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Hi RT's,&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Recently a friend
was discussing option trading and asked if the premium of an option can
ever be greater than the value of the underlying.&nbsp; My immediate answer
was no, because of the leverage involved an option will always sell for
a fraction of the underlying.&nbsp; He replied "But what about the time
value?"&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This started me
thinking.&nbsp; Can there ever be an option deep enough in the money, with
enough time value that the option's premium is greater than the value of
the underlying?&nbsp; I suspect it might happen with Leaps, possibly stock
options, but never with options on futures.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Perhaps the good Dr. OEX or other RTer can answer this.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Good luck and good trading,&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Ray Raffurty</BLOCKQUOTE>

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</x-html>From ???@??? Wed May 12 21:28:27 1999
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Date: Thu, 13 May 1999 11:57:10 +0800
Reply-To: kish@xxxxxxxxxxxxxxx
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From: kish <kish@xxxxxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: Singapore Stock Index
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Can anyone explain the following charts.
One shows the Straits Times Index with a Wave 5 sequence
and the other Shows the Morgan Stanley Singapore Index
showing a Wave 3 Sequence.
What does one do in a situation like this when equity values here
have more than trippled in the past six months. 

Kish
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