# Why would a long term option contract that's "in the money" trade at exactly the difference between strike and stock price?

A stock currently trades at \$70.05 has the following option contract:

3/1/2019 \$44 call

The bid of this call is \$26.05 which is the call's intrinsic value (the difference between \$70.05 and \$44.00). This means that with 6 months until expiration, it has almost has zero time premium? How is it possible that there is there NO value (volatility, time etc.) included in the option price? When or why would a stock option have no value beyond the guarantee (intrinsic value)?

I've also observed that throughout the day that this contract moves almost exactly as much as the stock moves as though the option itself has no value.

## 3 Answers

Delta is the ratio of change in the option compared to the change in the underlying. Delta is also an approximation of the probability that the option will expire in the money. It's an approximation because its value is affected by other factors, primarily implied volatility (IV).

In your example, the \$44 call has a delta of approximately the 98 to 99 (or more), depending on the IV. That means that the probability that this option will expire in the money is approaching 100% and therefore, there is no risk premium (time value). Because the delta is near 100, the call's price will move close to \$1 for every \$1 that the underlying moves (as you observed).

Dividends affect option premium as well. The higher the dividend, the greater put prices will be and the lower call prices will be. So if there is a decent sized dividend, you will often see that the bid of deep in-the-money (ITM) calls will be even less than the intrinsic value.

This leads to another concept, namely using high delta deep ITM calls as a substitute for stock ownership, preferably with LEAPs. The drawbacks are not receiving the dividend (if any) and paying a small time premium. The advantage is that there is less risk should the underlying collapse, especially before expiration. Google "Stock Replacement Strategy" and "Poor Man's Covered Call" for more information.

• This is in some sense the opposite of selling a covered call. It's more like buying a stock and hedging it with a deep OTM put. Sep 4, 2018 at 19:52
• @Acccumulation - I'm not really sure what the "This" is or what the "opposite" is that you are referring to. A covered call (referring to the entire B/W position rather than the short call being covered) is synthetically equivalent to selling a short put. Buying a stock and hedging it with a deep OTM put would be equivalent to buying a call and doing the latter makes more sense since it has the potential for fewer transactions and less B/A slippage. Sep 4, 2018 at 20:12
• "This" refers to the position the OP describes: a deep ITM call. A straight-up long position in a stock can be thought of as a risk of loss plus a possibility of gain. Buying a call gets you the possibility of gain while limiting possibility of loss. Selling a covered call keeps the possibility of loss while limiting your possible gain. That what I mean by them being opposite. Sep 4, 2018 at 20:46
• @Acccumulation - That's somewhat true if you're looking at this segmentally but in the overall picture, it's not the case since the risk graphs of the various positions that you cited are totally different. A long put is the opposite of a long call (ignoring the theoretical infinity aspect). A bullish vertical is the opposite of a bearish vertical (same series). Long calendar vs short calendar. These are mirror image (opposite) positions. Sep 4, 2018 at 23:22

When or why would a stock option have no value beyond the guarantee?

Because the market thinks there is virtually zero chance that the stock will drop below \$44 (a 37% drop) before March 1, and no one is willing to pay a premium for that possibility. So the downside protection provided by the call has zero value (or at least less value than the tick size of 0.01). This is not uncommon for deep in-the-money options. Conversely, deep out-of-the-money options often have no value since there is very little probability of them moving into the money before expiry.

If you think the option should have some time value, then the play would be to buy the call and short the stock. You would profit if the stock drops sufficiently to add time value back to the option (it wouldn't have to drop necessarily to \$44; just enough to add some possibility of that happening). At worst, you'd be out transaction costs and borrowing costs from shorting the stock.

• Additionally, if this is a stock that does not interest option trades much, you could be looking at out of date bid-ask data that does not reflect the current stock price. When one attempts to trade these low volume options, they find their bid or ask, that may seem currently attractive, have no takers. Sep 4, 2018 at 16:22
• @Pete B - That would be true if looking at the price of the last trade or if looking at closing quotes but it would not be true if looking at real time quotes for the stock and the call during trading hours. Sep 4, 2018 at 16:37

Aside from what was already stated, consider also that the next possible higher price would be \$ 26.06, which is 0.038% higher. That implies that the chance of it falling below the 44 is considered at max 0.019%, which is far from zero (about 1 in 5263).