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Why are these deep in-the-money FLEX options seemingly bought at a discount?

Quantitative Finance Asked by Derek Shen on October 27, 2021

SPY Initial Reference Value

Purchased Call Options

98% of the initial reference value is .98 x 267.88 dollars, which equals 262.52 dollars. However, the market value of each call contract they purchase is 247.42 dollars.

How are they purchasing these call options at a discount?

Here’s the link to the prospectus (the reference value is on page 8, and the options price is on page 21): https://mplusfunds.com/defined-preservation-95-fund-fact-sheet-standard/prospectus-alaia-series-7-1-defined-preservation-95-fund-10-31-18/

2 Answers

SPY pays dividends ~1.8%, and the expiry is ~3y (as of date was 2018, 2021 expiry), so the it looks like there is a discount

  • Assuming $0 time value

$$OptionValue=Intrinsic Value+Time Value $$ $$OptionValue= (S-K)-Dividend$$ $$OptionValue=267x(1-0.02)-267x1.8%x3=\$247$$

Answered by ryc on October 27, 2021

I suspect that the reference value is, well, only for reference and not the real price.

Maybe the price of SPY when the call contract is bought is lower

Answered by Preston Lui on October 27, 2021

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