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

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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 portfolios 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 movements 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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