Let me start by saying that I'm brand new to options trading. I'm still trying to understand how everything works and the concepts behind and terminology involved. However everything makes sense when the strike price is near the market price, but I've run across an inconsistency that I can't rationalize and I was hoping to find someone to explain it.
The underlying stock's current market price is around 25. The put premium between the strike prices $10 and $60 is fairly close to intrinsic value. The time value is between $.00 and about $2. That's all reasonable, but when you get above a $60 strike price on the put, the premium doesn't skyrocket like I would think it should. It seems like there's a -$50 time value as the central value (instead of the $0-2). First off, a negative time value doesn't make any sense. And 2nd, they are way too much in the money.
At first I thought maybe it was a European style option, but it is listed as American style. As I read it, you could buy a $120 strike price option for $53. So if that's the case, why wouldn't you just buy several put options and then immediately exercise them. Thus buy the stock @ 25, sell it at 120 and having paid 53 for the premium, net $42 per share. Multiply that by 100, and before transaction costs you're looking at $4200 per contract. I know this can't be right, but what is the missing piece to the puzzle?
Next I considered that maybe they are just using really old pricing data, but there is a string of like 15 strike prices that all net similar profits. There are also several expiration dates that show similar trends. I know many people trade the "options" and don't exercise them when they are in the money, but this doesn't explain why so much money is left on the table. The premium should reflect the relatively low price of the stock due to recent market drops. To investigate, I pulled up the last trades and the current bid and ask pricing. It all seems to align with the above model. Volume is extremely low, but there have been trades in the past few weeks. Who would write such a contract with so little premium and such potential loss on day 1?
Thank you!
The underlying stock's current market price is around 25. The put premium between the strike prices $10 and $60 is fairly close to intrinsic value. The time value is between $.00 and about $2. That's all reasonable, but when you get above a $60 strike price on the put, the premium doesn't skyrocket like I would think it should. It seems like there's a -$50 time value as the central value (instead of the $0-2). First off, a negative time value doesn't make any sense. And 2nd, they are way too much in the money.
At first I thought maybe it was a European style option, but it is listed as American style. As I read it, you could buy a $120 strike price option for $53. So if that's the case, why wouldn't you just buy several put options and then immediately exercise them. Thus buy the stock @ 25, sell it at 120 and having paid 53 for the premium, net $42 per share. Multiply that by 100, and before transaction costs you're looking at $4200 per contract. I know this can't be right, but what is the missing piece to the puzzle?
Next I considered that maybe they are just using really old pricing data, but there is a string of like 15 strike prices that all net similar profits. There are also several expiration dates that show similar trends. I know many people trade the "options" and don't exercise them when they are in the money, but this doesn't explain why so much money is left on the table. The premium should reflect the relatively low price of the stock due to recent market drops. To investigate, I pulled up the last trades and the current bid and ask pricing. It all seems to align with the above model. Volume is extremely low, but there have been trades in the past few weeks. Who would write such a contract with so little premium and such potential loss on day 1?
Thank you!
I don't OPT!!
