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re: Pelosi Buys Palo Alto Networks Stock
Posted on 5/19/24 at 3:06 pm to SquatchDawg
Posted on 5/19/24 at 3:06 pm to SquatchDawg
quote:
Help me understand this.
If she buys call options on the 21st with a strike at $200, the stock was trading at $260ish…..so wouldn’t she pay a premium because she’s already in the money? If she was playing some long game wouldn’t it make more sense to buy a strike a little higher than the current price?
Obviously I’m not an options trader.
It’s a good question.
It depends on the trader’s strategy. The deeper in the money an option is, the more it will trade like the underlying stock (just meaning $ for $ movement). By being deep in the money, as this trade apparently is, the trader has established a sort of synthetic long stock position - only for a significantly smaller amount of capital than if they’d bought the stock. And because U.S. equities trade American style options, the trader can exercise the ITM options at anytime prior to expiration, if they so choose. But typically, traders close the long option position prior to expiration. So basically, you can think of buying a deep ITM call as akin to being long the stock, just for less money. Does that make sense?
As for premium, both in the money and out of the money options will have some amount of premium attached - the amount of premium or option value will be affected by different variables in each case. And without going into a lot of detail, deep in the money options, already being in the money, have more intrinsic value (premium), and less extrinsic. Whereas an out of the money option would have more extrinsic/speculative value (premium) and no meaningful intrinsic value (because it’s not yet in the money). And they’re both going to be affected by implied volatility and the time value (adding to the premium) that the expiration date dictates.
That’s not a complete explanation, but hopefully it’s enough to roughly answer your question, without being overly confusing.
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