A friend of yours tells you she holds an American call option that is very deep- in-the-money. She tells you she’s going to exercise it now and cash in on her winnings. Is this a wise move to make?
A friend of yours tells you she holds an American call option that is very deep- in-the-money. She tells you she’s going to exercise it now and cash in on her winnings. Is this a wise move to make?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Q. A friend of yours tells you she holds an American call option that is very deep-
in-the-money. She tells you she’s going to exercise it now and cash in on her
winnings. Is this a wise move to make?
- The answer to this question is given below but I don't understand the explanation, please clearly explain in simple terms.
No, she should sell it. Sell now you get intrinsic value PLUS time value,
rather than exercise now which leads to just S-X.
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How can she earn the time premium? I am very confused. How can she sell it without buying first?
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