Oppies question

[skyQuake]

Hey guys, help with an oppie pricing question.

WBCFW7 - Lots just got traded through at $7.70s
American 19.50 Dec 17 calls.
WBC @ 27.20s around that time

It seems grossly undervalued at $7.70 or am I missing something?

 

[cutz]

Hi skyQuake,

WBC goes ex div (72cents) on the 5 Nov.

 

[skyQuake]

Hi skyQuake,

WBC goes ex div (72cents) on the 5 Nov.

Does the strike price get adjusted down for calls/do you get the divvie?

I'm gonna take a wild stab in the dark here and assume strike doesn't get adjusted for American oppies but yes for european ?

 

[cutz]

Hi again skyQuake,

The strike price doesn't change, what you need to take into account is the stock is carrying a 72cent dividend which will be lost during the term of the contract, this is reflected in the pricing of the call.

I guess you can say that the deep in the money option appears to be undervalued but if you add the dividend amount to the premium you will get a true indication of what the call is trading at, when the stock loses its dividend the deep in the money call won't plunge in value because it was already trading at a perceived discount (the dividend amount).

Hope i'm making sense.

 

[skyQuake]

Thanks for that; I had previously thought that the strike would get adjusted like a warrant.

Cheers