Explain how it went wrong?

[raf_bcn]

What you're mainly referring to is a change in TOTAL PREMIUM due to an underlying move, whereby the delta dictates most of the change. Since an ITM call has a higher delta than the equivalent OTM put, the call changes more... but that's only the intrinsic part. The extrinsic part, which I call the time premium, will be the same for both... and therefore change the same

For ITM calls , what is the correct theoretically intrinsic value ? the difference between the strike and the spot , or maybe that difference multiplied by his delta.
e.g.

spot = 100
98 call = 2.70 with delta = 0.80

a) Intrinsic value = 2.00

b) Intrinsic value = 2 x 0.80 = 1.60

The commonly accepted is a) . But sometimes I think that the todays intrinsic value for that call has to consider the probability of ending ITM, which is delta.


So if the underlying goes +1

a) Intrinsic value = 3.00

b) Intrinsic value = 1.60 + 0.80 = 2.40

Please I would like to know what you think about this.


Thank you.

 

[JackRab]

An itm call will be early exercised the day before ex dividend if the dividend is more than his extrinsic value.

Hey RAF... you need to be careful here, you have to look at the value of the same strike put... because it's very likely that while an ITM call looks to only have a little bit of extrinsic value, it might not be an early exercise. If you look at the break even point where it makes no difference, you will see that it's very likely that the extrinsic value is almost zero. It's always about what you give up/what you gain.

And the OP will also have to pay the dividends for the short stock , as he was short the day before ex dividend date.

This doesn't really matter, since cum-div Apple was at 188, ex-div Apple was at 187.27. So you gain on the short, but you have to deliver the dividend... so nett zero (ceterus paribus).

 

[JackRab]

For ITM calls , what is the correct theoretically intrinsic value ? the difference between the strike and the spot , or maybe that difference multiplied by his delta.
e.g.

spot = 100
98 call = 2.70 with delta = 0.80

a) Intrinsic value = 2.00

b) Intrinsic value = 2 x 0.80 = 1.60

The commonly accepted is a) . But sometimes I think that the todays intrinsic value for that call has to consider the probability of ending ITM, which is delta.


So if the underlying goes +1

a) Intrinsic value = 3.00

b) Intrinsic value = 1.60 + 0.80 = 2.40

Please I would like to know what you think about this.


Thank you.

Intrinsic value is always Spot-Strike+Interest... Or Spot-discountedStrike. The delta doesn't really have anything to do with the intrinsic value.... it kinda shows the change in extrinsic value due to move in the underlying...

Say... 80d call (=20d put)... stock goes up 1, so the intrinsic value of the call goes up by 1.. but the extrinsic value goes down by 0.20.... so total call value up by 0.80.
This is because the put value (which is entirely extrinsic) goes down by 0.20....
So again, for a quick calculation for the extrinsic value of any option (except in dividend situation and some others)... look at the same strike OTM value.

 

[Hunnusunnu]

So was this trade an Iron Condor or no?

 

[OptionsOptionsOptions]

So was this trade an Iron Condor or no?

• OTM Call Credit Spread.
• Then it become ITM - hence his dilemma of dealing with short ITM options.