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  #11  
Old 11-22-2005, 10:23 AM
SuitedPair SuitedPair is offline
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Default Re: why are FDG 2008 call options below market price?

The main reason is the high dividend yield the stock pays. Typically, when the dividend is paid the stock drops by the amount of the dividend, otherwise there would be a great arbitrage opportunity. Since this is a high dividend paying stock and investors think that the company will continue to pay dividends in the future the stock price will be reduced by the dividend amount more in the out years.

Another aspect is the seller of the call will likely be collecting the dividend. When he sells the call to you he would likely buy the stock to hedge his book. Since he is long the stock he will collect the dividend. This would also make the call option less attractive compared to owning the stock outright, thus lowering the price an investor should be willing to pay for the call option.

These are active options, just eyeballing open interest it looks over 100,000. There are several investors that arbitrage these high dividend stocks betting on future dividend payments.

I'd bet that investors are betting that the div. drops causing the share price to drop. ( I know that seems counter to the first paragraph, but I think you know what I'm getting at).

I’m not sure how clear any of this is, I’m rushing before the open.
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  #12  
Old 11-22-2005, 10:40 AM
Sniper Sniper is offline
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Default Re: why are FDG 2008 call options below market price?

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At any rate, it seems that neither you nor I have all the facts Charlie had when he made his comment,

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Buff, how can you possibly evaluate the comment, without all the facts?
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  #13  
Old 11-22-2005, 11:44 AM
edtost edtost is offline
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Default Re: why are FDG 2008 call options below market price?

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If the strike=$30 and the strike=$60 options were issued on the same date, Black-Scholes would obviously value the $30 strike option higher (as would all option pricing formulas).

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I thought that was exactly his point. They had the same expiration (I don't see how the date of issue matters, but of course expiration does)

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if they were issued at different times, and he measured prices when each one was issued, any relation between the two is possible.

note that i have no idea when he measured prices or whether they were in fact issued at the same time.
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  #14  
Old 11-22-2005, 11:52 AM
buffett buffett is offline
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Default Re: why are FDG 2008 call options below market price?

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how can you possibly evaluate the comment, without all the facts?

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That's all investing (and maybe even life) is....making decisions with imperfect/incomplete information. You've gotta make judgment calls, assumptions, extrapolations, etc.
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  #15  
Old 11-22-2005, 11:54 AM
FatOtt FatOtt is offline
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Default Re: why are FDG 2008 call options below market price?

[ QUOTE ]

if they were issued at different times, and he measured prices when each one was issued, any relation between the two is possible.

note that i have no idea when he measured prices or whether they were in fact issued at the same time.

[/ QUOTE ]

They were issued at different times. Both sets of options under comparison were issued at strike price = market price, and thus different times.
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  #16  
Old 11-22-2005, 12:00 PM
FatOtt FatOtt is offline
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Default Re: why are FDG 2008 call options below market price?

[ QUOTE ]
If the strike=$30 and the strike=$60 options were issued on the same date, Black-Scholes would obviously value the $30 strike option higher (as would all option pricing formulas).

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I thought that was exactly his point. They had the same expiration (I don't see how the date of issue matters, but of course expiration does), but the $60s were higher, which prompted his remark of "insane."

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No, I'm saying that Black-Scholes (the tool that Munger hates) would value the k=30 and k=60 options such that the k=30 option was more valuable. Munger's statement refers to the fact that Costco issued options at k=60 and options at k=30 (separate times). At the issue dates, the k=60 options were worth more (according to Black-Scholes) than the k=30 options. His argument was, "How can the option to buy something at $60 be worth more then the option to buy that very same thing at $30?" He completely ignored that the stock price itself (the perceived value of the firm) had changed between the two issue dates.

I'm not even saying that Black-Scholes is good or bad, but Munger's argument in this case is bad. As edtoast noted, unless the two options are granted on the same date (into the same environment, with the same underlying's expectations), any comparison between the model's prices is faulty.
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