Everytime, I’m amazed by the fact that when most people get into trading, they choose option trading.
They just can’t resist the rush that is involved. The problem though is that their education in the mathematics of options is far from good. When I meet such traders, who some are self proclaimed experienced trader, I always ask them the same question and most fail to answer correctly.
What do I ask? Simple, I ask if the price of a call option, written on some underlying, can ever exceed the price of that underlying before expiry? If you can’t answer that then I suggest you go back to the blackboard and work these out before you enter this tough game of option pricing and misprice options.
hint: if there is such situation, there is an arbitrage opportunity.
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maybe i didn’t understand that Q.
lets say this:
A stock worth 100$
call 10$ internal value is 90&
let’s say volatility is high and there’s 6 months to expiry…
you think the call price won’t be higher than 100$?
I am not sure I understand the scenario you had put. If the stock is worth 100$ and the option is let’s say 105$, You’d sell the option and buy the stock. You had made 5$ and you are covered since you have the stock.
ok now i get the confusion…
you’re talking strictly math - black&scholes-wise…
it’s not that uncommon to actually see that…(i.e men are not machines)
I’d be the first to point out the weakness in Black and Scholes. But this situation is a classic arbitrage with no relations to any model.
HEllo. Just added your link here.
I would advise deleted the link above me. I’m sure that is not something you want on your site! By the way I enjoy your posts. I think it is important for beginning options traders to read honest posts and not the glam of the rush.
Have a happy holiday and a prosperous new year,
Lindsay at the TraderBlog