37 lines
1.7 KiB
Plaintext
37 lines
1.7 KiB
Plaintext
The Intelligent Investor’s Guide to Option Pricing • 53
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Notice that by moving the strike down from an expected 5 percent chance
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of success to an expected 20 percent chance of success, we have agreed that we
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would pay four times the amount to play. What would happen if we lowered the
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strike to $50 so that the exposure range started at the present price of the stock?
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Obviously, this at-the-money (ATM) option would be more expensive still:
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5/18/2012
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30
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20
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40
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50
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60
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70
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80
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90
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100
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5/20/2013 249 499 749 999
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Advanced Building Corp. (ABC)
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Date/Day Count
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Stock Price
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GREEN
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The range of upside exposure we have gained with this option is not only
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well within the BSM probability cone, but in fact it lies across the dotted line in-
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dicating the “most likely” future stock value as predicted by the BSM. In other
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words, this option has a bit better than a 50 percent chance of paying off, so it
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should be proportionally more expensive than either of our previous options.
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The payouts and probabilities I provided earlier are completely made
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up in order to show the principles underlying the probabilistic pricing of
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option contracts. However, by looking at an option pricing screen, it is very
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easy to extrapolate annualized prices associated with each of the probabil-
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ity levels I mentioned—5, 20, and 50 percent.
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The following table lists the relative market prices of call options cor-
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responding to each of the preceding diagrams.
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1 The table also shows the
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calculation of the call price as a percentage of the present price of the stock
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($50) as well as the strike–stock price ratio , which shows how far above or
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below the present stock price a given strike price is. |