Thanks See. This was posted on Minyanville. It might relate to what you mentioned about RIMM's options really pooping today. I think much depends on what strikes you are positioned in. Of course when stock moves up 35 points - all call options pop!
From Minyanville's Buzz and Banter..
" had a few August 160 calls on Research in Motion (RIMM) coming into today and sold them this morning. I'm not complaining but I do have a question.
The August 160's closed yesterday at $13.10. RIMM stock closed at 165.59. Basically, an $8.59 time premium on the calls. Right now, those August 160 calls are priced at $36.60 with the stock trading at $194.80. The time premium has now been shrunk to $1.80.
My question is why did the time premium shrink so much this morning? Obviously I was hoping if the stock opened at $195, the options would have been valued at $43.00. ($35 + an $8.00 time premium). That wasn't the case. Thanks. Hope you're doing well.
Minyan Wendy
The short answer is that the “time premium” portion of an option's value is a bit of a misnomer. It’s time, event-premium, and distance between the stock and the strike price. Really, "time value" is a blanket expression covering "everything except the price of the option minus the price of the stock."
In the case of Research in Motion (RIMM), when the stock went to 194, your option was suddenly 34 in the money and was post the only major catalyst (event) between now and expiration. In other words, the “time premium” was reduced to exactly and only that... A premium on owning the call for the balance of the time between now and the third Friday of August. You lost more than one day of time value, you lost the catalyst and the leverage value of owning the call vs a stock (why pay $34 for a relatively illiquid call instead of just buying stock?).
Of course, you gained $23.50 per contract so, you know, it’s better than a poke in the eye with a big sharp stick, as we say in the industry.
Nice Trade! <<<<<<<<<<<
