It is assumed that you are familiar with option

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Unformatted text preview: assumed that you are familiar with option pricing fundamentals, and the concepts of volatility and time decay. Note that for the purpose of simplicity, transaction costs, tax considerations and the cost of funding are not included in the examples. An illustration is used with each strategy to demonstrate the effect of time decay on the total option premium involved in the position. The basic diagram in the black shows the profit/loss scale on the left vertical axis. The horizontal zero line in the middle is the break even point, not including transation costs. Therefore, anything above the line indicates profits, anything below it, losses. The price of the underlying instrument would be represented by a scale along the bottom, with lower prices to the left and higher prices to the right. "A", "B", "C" and "D" in the diagrams indicate the strike price(s) involved. Arrows on the diagrams indicate what impact the decay of option prices over...
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This note was uploaded on 08/30/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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