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Intel Corporation Message Board

  • vinebills vinebills Feb 8, 2013 11:11 PM Flag

    Question on Options - Deep ITM

    Intel closed at $21.00. I was looking at the $13 strike ITM call options: Jan 2014 had an ask for $8.05 and Jan 2015 had an ask for $8.10. Is that a pricing error? ( I understand that the deeper you go ITM the time value drops. but time value difference of 5 cents for a year - somthing looks incorrect here?)

    If I had to pay 5 more cents and I get another year - why the heck would anybody buy a Jan 2014 options in the first place?

    What are the risks( other that drop in price of underlying) for a deep ITM options? Vega changing?

    Sentiment: Strong Buy

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    • I just looked at the options and you are correct about the ask prices.

      TIME VALUE:
      If you look at the SPREAD of the bid/ask of the two year $13 strikes.
      2014 $13 Call: $8.00/$8.05
      2015 $13 Call: $8.00/$8.10

      The BID and ASK SIZE indicates there are 100-200 contracts at each one. I would not be surprised to see the B/A SIZE vaporize after a couple contracts if you put a close LIMIT.

      With Intel price at $21, the $13 calls are $8 ITM. $29 PUT contracts are $8 ITM. $29 strike does not exist but the deeper $30 strikes exist.
      2014 $30 Put:$9.60/$9.70
      2015 $30 Put: $10.55/$10/65

      There is a $0.95 difference in the Put contracts .... and guess what: The dividend for 1 year is now $0.90.

      For stocks with high yield, sell the puts and buy the calls.

      "why the heck would anybody buy a Jan 2014 options in the first place?"

      You are staring at the effect of dividend arbitraging on option pricing. The option market maker is encouraging transactions via pricing. I am REALLY surprised that you can buy the 2015 for a TOTAL of a 10 cent premium.

      • 1 Reply to alexander.dumbass
      • Thanks for responding alex.

        This is not the first instance that for a year( 2014 vs 2015) the diff in premium is small. Even the other day ( I dont have data) I observed the same.
        If the markets correct I was planning to buy deep ITM call options and am keeping a close eye on the prices. It looks like I can buy 2015 call options by paying a 5 to 10 cent premium over 2014 calls.

        Another question:

        If I can buy $13 strike intel by paying $8.xx somthing for a Jan 2015 calls and a person like me who beleives that intel will bounce back in late 2013......

        a) why would you buy the stock instead buy these calls?( I understand there is a small time value I am paying - a risk I am willing to take considering the fact that less capital needed).

        b) If I dont excersise my options I dont get dividends. I am aware of that.( I am willing to skip one or two dividends - again the logic being I am deploying less cash and looking for capital gains/ markets will reward the R&D efforts of intel at some point - which is what I am trying to capture)

        what am I missing here alex?

        Sentiment: Strong Buy

 
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