Download An introduction to options trading by Frans de Weert PDF

By Frans de Weert

Explaining the idea and perform of thoughts from scratch, this publication makes a speciality of the sensible aspect of innovations buying and selling, and offers with hedging of innovations and the way strategies investors generate profits by means of doing so.  universal phrases in choice thought are defined and readers are proven how they relate to profit.  The ebook supplies the required instruments to accommodate recommendations in perform and it comprises mathematical formulae to raise factors from a superficial level.  during the booklet real-life examples will illustrate why traders use alternative buildings to meet their wishes.

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Example text

However, this is not quite 1 St stands for the stock price at time t and K stands for the strike of the option. 12 AN INTRODUCTION TO OPTIONS TRADING true, because the seller of the option gets $4 a year earlier than the buyer of the option. So, in fact the fair price of the option should be that amount of money such that when it is put in a savings account for 1 year it has grown to $4. This means that if the interest rate is 6% per year the fair price is 4=1:06 ¼ $3:77. The foregoing is referred to as ‘discounting’, and in this case $4 is discounted at 6%.

The Black–Scholes formula gives the price of an option, which would suggest there could only be one price for an option, regardless of supply and demand. But, as has been pointed out, at the time an investor has to decide whether or not to buy an option, he does not know what the volatility of the option will be during the term of this option. So, different market participants have different views on what the volatility will be, and therefore have different views on what should be the fair price of an option.

Furthermore, it is good to discuss the economic principle of discounting here. The easiest way to illustrate this is by means of an example. Consider an option trader who owns a European option with an expiration date in 1 year and an expected payoff at maturity of $4. One could be tempted to say that the price of this option should be $4 as well, since in this case both sides of the option contract will have expected profit of 0. However, this is not quite 1 St stands for the stock price at time t and K stands for the strike of the option.

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