CHAPTER 14
Strike Two and Time Travel
“What’sthat?” “Well, the time frame is a problem. I’ll accept the $5-per-share credit and the $40 strike price, but I won’t make a trade for longer than one month.”
“Well, if the expiration period is only one month long, I’m not willing to pay $5 for it,” replied Lon. “This is the same as with calls. The longer the time frame, the better my chances are, and the more I will be willing to pay to make a deal.”
“Right. And because my risk goes up with longer time frames, I will demand more money to make a deal,” replied Shorty. “So I guess this is a relationship we can predict for puts as well as for calls: the longer the time frame of the deal, the greater the debit/credit required to make the deal.”
“That’s right. So where do we end up?” asked Lon. “What if I offer you a one-month expiration period, but a $2 credit. Will you take that?”
Shorty thought it through. Over the next month, if the Nextall stock drops below the strike price of $40, say to $30, Lon will exercise his option, put his 100 shares to me, and force me to buy them at $40. I’ll own his shares at a high price. Good deal for him; bad for me. But if the stock rises and stays above the strike price of $40, say around $45, then he won’t exercise his option—again, he would be stupid to force me to buy his shares at our strike price of $40 when he can sell them on the market for $45. So I want a strike price that will stay lower than the market price for a month. The stock is selling ...
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