Chapter 15 - Option Strategies Naked Strategies long call...

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Chapter 15: Stock Options Market - option price from Black-Scholes formula is fair in that it ensures that riskless arbitrage cannot take place - model assumes that the variance of the stock price is constant over the life of the option and that it is known with certainty Diffusion process – stock price can take on any positive value, but when it moves from one price to another, it must take on all values in between Jump process – prices are not continuous and smooth but do jump from one price across intervening values to the next; Merton, Cox, and Ross used this idea for model - assumption the short-term risk free rate was same for borrowing and lending
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Unformatted text preview: Option Strategies: Naked Strategies: long call/ paper buying strategy – allocating a portion of a portfolio’s funds to purchase a call option and investing the balance of the funds in a risk-free or low-risk money market instrument- covered call writing allows the investor to reduce the downside risk for the portfolio- investor agrees to cap the potential profit- protective put strategy is long put long stock and allows participation in upward movement’s in the stock Warrant – contract that gives the holder of the warrant the right but not the obligation to buy a designated number of shares of a stock at a specified price before a set date...
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