extrinsec value itm options Spx Spy

R

raf_bcn

Hi
I've just started getting interested in the options. Absolutely newbie, never placed a trade in real market.
And i have found this site.
The amount of information in this forum is incredible.
_I Would like to ask to the participants a question. I have observed that the Spx deep itm calls have negative extrinsic value.
I'm looking the prices in thinkorswim. That doesn't happens with itm puts. What's the reason.
_Also doesn't seem to occur in Spy calls.
It seems to be a diferent extrinsic value structure between Spx and Spy options. Spx puts seems to have more extrinsec value than the same strike call all over the option chain. But in the Spy is different, and all the itm option have more extrinsec value than the same strike otm options. What is the reason?

Also want to apologize for my English, I understand everything but far from expressing myself correctly.

Thank you
 
raf_bcn said:
Hi
I've just started getting interested in the options. Absolutely newbie, never placed a trade in real market.
And i have found this site.
The amount of information in this forum is incredible.
_I Would like to ask to the participants a question. I have observed that the Spx deep itm calls have negative extrinsic value.
I'm looking the prices in thinkorswim. That doesn't happens with itm puts. What's the reason.
_Also doesn't seem to occur in Spy calls.
It seems to be a diferent extrinsic value structure between Spx and Spy options. Spx puts seems to have more extrinsec value than the same strike call all over the option chain. But in the Spy is different, and all the itm option have more extrinsec value than the same strike otm options. What is the reason?

Also want to apologize for my English, I understand everything but far from expressing myself correctly.

Thank you
More...

Well, firstly, your command of English seems (to me) to be a damn sight better than most 'Merican speakers. "No worries" here.

Second: "Deep In The Money" also means ferociously-thinly traded: which means pricing (whether stated NBBO bid or ask, "mids," mark, or something else[!!] -- they are *all* suspect. If you look at the bid-ask spreads, they are very wide. This means that while your entry might be attractive, your exit might be a ghost that disappears at the first ray of light. (Which means, you can *not* exit the position for anything close to a reasonable price.)

Looked at in that (DITM thin-pricing issues) light, your extrinsic-value observations may have lost their "umph"....?
 
raf_bcn said:
Hi
I've just started getting interested in the options. Absolutely newbie, never placed a trade in real market.
And i have found this site.
The amount of information in this forum is incredible.
_I Would like to ask to the participants a question. I have observed that the Spx deep itm calls have negative extrinsic value.
I'm looking the prices in thinkorswim. That doesn't happens with itm puts. What's the reason.
_Also doesn't seem to occur in Spy calls.
It seems to be a diferent extrinsic value structure between Spx and Spy options. Spx puts seems to have more extrinsec value than the same strike call all over the option chain. But in the Spy is different, and all the itm option have more extrinsec value than the same strike otm options. What is the reason?

Also want to apologize for my English, I understand everything but far from expressing myself correctly.

Thank you
More...

SPX options are priced vs the SP or ES future, not the cash, unless very close to expiration.
SPY options are priced vs the SPY ETF.
 
There's no negative extrinsic value.. only below intrinsic value ;)

That said... you're wrong. Well, you can trade below intrinsic value, by selling an ITM option at the bid.. which I wouldn't do, because why would you hand over cash to someone else?
You could try to buy below intrinsic...... but good luck with that since mainly market makers will be ahead of you.

You might be comparing apples with oranges. It's likely you're looking at European-style options that are based on underlying prices where the future is trading below the index, usually when dividends are involved.

It would be handy if you provided a screenshot or the actual numbers involved.
 
As you can see here, the S&P futures trade at lower prices as time to expiration get longer. The SPY options trade against the one SPY ETF that only has one price. If you compare a deep in the money Dec 2017 SPX call with the SPX cash you can view that it appears to be very low vs the cash, but you can't hedge with the cash if you buy it. You have to sell a basket of 500 stocks and pay dividends, commissions and short stock fees-or sell the future.
upload_2017-3-30_4-53-6.png
 
tommcginnis said:
Well, firstly, your command of English seems (to me) to be a damn sight better than most 'Merican speakers. "No worries" here.

Second: "Deep In The Money" also means ferociously-thinly traded: which means pricing (whether stated NBBO bid or ask, "mids," mark, or something else[!!] -- they are *all* suspect. If you look at the bid-ask spreads, they are very wide. This means that while your entry might be attractive, your exit might be a ghost that disappears at the first ray of light. (Which means, you can *not* exit the position for anything close to a reasonable price.)

Looked at in that (DITM thin-pricing issues) light, your extrinsic-value observations may have lost their "umph"....?
More...

Hi
Thank you for the response.
Yes, deep itm options have low liquidity. But someone buys and sells them.
Spx call 1000 May19 has an open interest of 3.100, and the strike 2.000 also has 3.100.
_Agree with you that exit the strategy could be very difficult. The strategy I am thinking let the options expire because of this.
 
Robert Morse said:
SPX options are priced vs the SP or ES future, not the cash, unless very close to expiration.
SPY options are priced vs the SPY ETF.
More...

Thank you
I also thought I might have something to do with the call put parity. If we buy a Spx synthetic future with options, buying call and selling put same strike , the resulting price has to be the same
as the price of the futures. And it seems to happen in the Spx. Maybe that's why the calls itm have negative extrinsec value, to mantain the difference between the extrinsic values of the call side and put side.
 
Last edited:
JackRab said:
There's no negative extrinsic value.. only below intrinsic value ;)

That said... you're wrong. Well, you can trade below intrinsic value, by selling an ITM option at the bid.. which I wouldn't do, because why would you hand over cash to someone else?
You could try to buy below intrinsic...... but good luck with that since mainly market makers will be ahead of you.

You might be comparing apples with oranges. It's likely you're looking at European-style options that are based on underlying prices where the future is trading below the index, usually when dividends are involved.

It would be handy if you provided a screenshot or the actual numbers involved.
More...


Thank you
You are right, the correct way to say it is below the intrinsec value. But it seems more clear to me if it is sayed in the other way, and it's easyest to write.
_Of course don't want to sell below the intrinsec value, but maybe want to buy. Want to ask you what would you mean by saying that mainly market maker would be ahead of me.
_So maybe the fact that Spx options are european style and Spy options are american could be an explanation of the different extrinsec value structure between Spx and Spy . What's the theory ?
 
SPX and SPY are different products... based on the same S&P500 index.. but still different. If you look at @Robert Morse's post... you see that generally the ES futures, (futures on S&P500) have a lower price at later maturities... that's because of dividends. Futures usually are priced on INDEX + INTEREST - DIVIDENDS... and then depending on the option style those are priced on those futures...

Say:
S&P500 INDEX = 2370
ES June'17 = 2360
ES June'18 = 2300
The June'17 1000 call (deep ITM) = 1360
The June'18 1000 call(deep ITM) = 1300
(I don't take interest rate into consideration for simplicity)

Now, it looks like both calls are trading below intrinsic, and the 2018 one even more than the 2017 one... but that's because they are European and priced on the respective futures, with dividends involved. So they are not below intrinsic value... you're just comparing the options with the wrong underlying value.

If they would be American-style:
June'17 1000 call = 1370
June'18 1000 call = 1370
Both should be exercised prior to dividends...
 
Hi

So the real underlying for SPX option is the price of the future and not the Spx spot price. Because they can't be exerised before the expiration day.

Therefore I understand people who buys itm calls with a discount, I mean with less intrinsec value than the SPX spot.
One ting is sure,in the expiration day the future and spot will have the same price. If Spx doesn't moves any point until the expiration day, the buyers will be able to sell the calls at a higher price than they bought, without movement of the spx.

But I don't understand people who sells those Spx itm calls, because they are selling bellow the price and every day until expiration the calls they sold will be increasing their intrinsec value, so to close their position they will have to pay more that what received.

There are huge OI in Spx itm calls. Who are selling them?
What do you think is their strategy?

thank you.
 
You must log in or register to reply here.
Back
Top