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Author: IlanBigfoot Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1203  
Subject: Re: Exercise the Option? Date: 3/4/2012 7:24 AM
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Q: the Option will still decline with time decay even if it is already so far in the money (assuming it stays at its current price or increases)?


Yes. Right now your $75.00 July call (UA120721C00075000) last had a bid of $19.50, and the stock itself traded at $92.22.

Doing the math, the call is worth $92.22-$75 = $17.22, know as "intrinsic value". If you exercised the call now and then sold the stock, that's what you'd get. If the stock goes up, this goes up too.

But the call currently trades for more, $19.50-$17.22 = $2.28 is the "time value". This excess to the intrinsic value is the premium a call buyer has to pay for the hope that the stock will go up even more in the next four months, by July. This will slowly leak away if the stock holds steady at $75. It may even increase if the stock starts to move violently, giving option buyers even more hope of a dramatic price increase.

So, if you love UA enough to hold the stock past July, regardless if the price goes up or down, you have two choices:

1. Use your call. Exercise it, and buy 100 shares of UA worth $9222 for only $7500. Hold the shares for future expected profit.

2. Sell your call for $1950, add only $7272 to the pot totaling $9222, and buy 100 shares. Save $228. Use the savings to buy an extra 2 shares, or pay fees and taxes on the trade, or....?
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