Derivatives
The Role of Arbitrage
In well-functioning markets with low transaction costs and a free flow of information, the same asset cannot sell for more than one price. If the same asset trade at a higher price in one place and a lower price in…
Exercise Value, Time Value, and Moneyness of an Option
The exercise value, time to expiry, and price of the underlying relative to the option’s exercise price all affect the price of the option. Exercise Value of an Option The exercise value of American and European options is different because…
Covered Calls and Protective Puts
Call and put options can be used to manage risk for holders of the underlying risk. Two common strategies are to reduce exposure by using a covered call (selling a call option) or to use a protective put (buying a…
Call & Put Option Profits and Payoffs
Call and put options have basic formulas for determining the value, profit, and break-even point at expiration, dependent on whether the investor has bought or sold the option. Using these basic characteristics, more complex option strategies can be evaluated. Standard…
