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The aim of this article is to explain how the option premium of an ITM long call changes as the underlying moves on the price chart. There will be three points in time that we will examine.
We will use DIA, the Dow Jones Industrial Average Exchange Traded Fund, for our example. At the first point in time that we will use, the Dow was trading at 126.50 and a one step in the money long August call was selected.
PART I: Friday close 07/08/2011
On July 8th, after the Dow (and the DIA) had been in a strong uptrend for a number of days, it became evident where the next area of resistance would be – at the 127 level. Figure 1 shows the daily chart of the DIA creating, at that time, a formation that seems like a Bull Flag.
Figure 1: Daily Chart of the DIA
The flag pole of the Bull Flag had formed since the June 27 rally initiated. After seven days of a strong upward move with only one day of pause (the small doji)...
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