This is an option. It gives you the right (but not the obligation) to do something. That right can’t have an intrinsic value less than zero, because in the worst case you do… nothing and you get… nothing. If I give you the right (but not the obligation) to give me £1,000,000 how much is this position worth to you?
This actually makes a lot of sense. It’s a simple concept and I now feel like an idiot for getting it wrong.
it’s absolutely intrinsic value since the definition for the time value of an option is the difference between the market value and the intrinsic value. so, if the market value is positive, but the option is out of the money, the intrinsic value is zero.
whodey, Yes it is simple. For an options trader it is very very clear… all that you lose is 0. But if there is a choice, you could lose the present value of the premium that you paid. Essentially, the premium is the amount lost that you will claim in your tax returns as realized losses. Here in the 4 options the only relavant option that I found was 0.
BullPow … what if the option is in the money… do the trader still get 0… ???
nope… he would make profit if the option is in the money right …recollecting that if a put option is in the money the current price of the underlying derivative is less than the Strike Price … he would get i.e. his total profits are: ( Strike Price ) - ( Current Stock Price which is less than the Strike Price if the option is in the money ) - ( Premium paid for the Option ). Now, if one is too picky, and say if it is a long term option (LEAPS), you may have paid some interest on the premium that you paid while purchasing the option…then you may want to use PV of the Premium paid instead of just premium…
BullPow Wrote: ------------------------------------------------------- > whodey, > Yes it is simple. For an options trader it is very > very clear… > > all that you lose is 0. But if there is a choice, > you could lose the present value of the premium > that you paid. Essentially, the premium is the > amount lost that you will claim in your tax > returns as realized losses. > > Here in the 4 options the only relavant option > that I found was 0. So what’s the bet that you are wrong? Honestly, any options trader should absolutely know that an American put is worth at least its intrinsic value.
The question is not about your payoff, it is about the value of the put…assume you didn’t buy the put, what’s the value of the put? It is X-s.
Actually, it is X - s + time value
yeah, I didn’t mean the “value”, but the minimum value…that’s the context of the question. So, the minimum value of an American put is always greater than or equal to strike price - current price (no time value). This statement takes care of negative cases as well, but we get a better answer (i.e., closer answer) by using zero instead of negative values.
Yep
Joey, Sorry I wasnt clear… and I wouldnt dare to bet with you :)) … as Dreary was saying it was about min bound value was the context of the question…