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Asset price when position... (2000).
| Content Provider | CiteSeerX |
|---|---|
| Author | Expiration, Hold Until |
| Abstract | This teaching note provides an overview of the most popular basic option trading strategies. This includes calls, puts, covered calls and protective puts. Teaching Note 97-11 covers advanced strategies such as spreads and straddles. We define the following terms: A(0) = price of underlying asset today, X = exercise price of option, T = expiration date of option. We assume no dividends are paid or costs incurred on holding the underlying asset. Consequently, A(T) = asset price at option expiration and T- 0 = T = time to expiration. We shall work with European options. At any time t, the call price is c(A(t),X,T-t) and the put price is p(A(t),X,T-t). Given values for the risk-free rate (r) and volatility (σ), the option prices are generally provided by the Black-Scholes formula. At expiration, c(A(T),X,0) = Max(0,A(T)- X) and p(A(T),X,0) = Max(0,X- A(T)). In what follows we shall examine the values of various option strategies at the end of two holding periods. In the first we close the option position prior to expiration and in the second we hold the position all the way to the option’s expiration. We shall derive formulas for the value of the position and illustrate the results graphically for a range of possible asset prices at the end of the holding period. For the numerical examples, |
| File Format | |
| Publisher Date | 2000-01-01 |
| Access Restriction | Open |
| Content Type | Text |
