The Black–Scholes price of an out-of-the-money call option with an exercise price
Problem 17.9.
The Black–Scholes price of an out-of-the-money call option with an exercise price of $40 is $4. A trader who has written the option plans to use a stop-loss strategy. The trader’s plan is to buy at $40.10 and to sell at $39.90. Estimate the expected number of times the stock will be bought or sold.
Hint
The strategy costs the trader 0.10 each time the stock is bought or sold. The total expected cost of the strategy, in present value terms, must be $4. This means that the expected number of times the stock will be bought or sold is approximately 40. ...
The strategy costs the trader 0.10 each time the stock is bought or sold. The total expected cost of the strategy, in present value terms, must be $4. This means that the expected number of times the stock will be bought or sold is approximately 40.
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