Download Advanced Option Pricing Models by Jeffrey Owen Katz PDF

By Jeffrey Owen Katz

Complicated choice Pricing types information particular stipulations below which present alternative pricing versions fail to supply exact rate estimates after which indicates choice investors how you can build enhanced versions for higher pricing in a much broader variety of industry stipulations. Model-building steps disguise suggestions pricing below conditional or marginal distributions, utilizing polynomial approximations and “curve fitting,” and compensating for suggest reversion. The authors additionally boost powerful prototype types that may be placed to quick use, with real-time examples of the types in motion.

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For stock prices less than $50, the lowermost curve lies on the x-axis, representing a premium of zero. The same curve shows a premium that increases one-for-one with stock price when stock prices are greater than $50 and the call is in-the-money. 000 One month to expiration Time value Three months to expiration At expiration Intrinsic value 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 Stock price A Review of Options Basics 35 When there is time remaining prior to expiration, call prices rise in a smooth but accelerating fashion with stock prices.

Time value is greater for the put with three months of remaining life than for the put with one month left to expiration. Finally, just as the calls in Figure 1–1 cushioned the trader against a decline in stock price and amplified an incline, puts amplify the profit from a decline in stock price, while cushioning 38 CHAPTER 1 the holder against a sudden rise. For a short-term or day trader, the purchase of a put is a good way to speculate on an anticipated decline in a stock’s price, or to cash in on a crash.

This follows because, for a stock price above the strike price, the long expiring call rises one-for-one with the stock, while the put remains valueless; for stock prices below the strike, the short expiring put rises one-for-one with declines A Review of Options Basics 45 in the stock, while the call premium remains at zero. Analyzed in this way, it is easy to understand why put-call parity must always exist at expiration. To the extent that the market is efficient, however, this simple relationship between the prices of puts and calls with the same terms will be enforced, not just at expiration, but at all times prior to expiration.

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