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For example, suppose a put option with a strike price of $100 for ABC stock is sold at $1.00 and a put option for ABC with a strike price of $90 is purchased for $0.50, and at the option's expiration the price of the stock or index is greater than the short put strike price of $100, then the return generated for this position is:
In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options.Essentially, the model uses a "discrete-time" (lattice based) model of the varying price over time of the underlying financial instrument, addressing cases where the closed-form Black–Scholes formula is wanting, which in general does not exist for the BOPM [1].
The technique applied then, is (1) to generate a large number of possible, but random, price paths for the underlying (or underlyings) via simulation, and (2) to then calculate the associated exercise value (i.e. "payoff") of the option for each path. (3) These payoffs are then averaged and (4) discounted to today.
A typical option strategy involves the purchase / selling of at least 2-3 different options (with different strikes and / or time to expiry), and the value of such portfolio may change in a very complex way. One very useful way to analyze and understand the behavior of a certain option strategy is by drawing its Profit graph.
A long butterfly options strategy consists of the following options: Long 1 call with a strike price of (X − a) Short 2 calls with a strike price of X; Long 1 call with a strike price of (X + a) where X = the spot price (i.e. current market price of underlying) and a > 0. Using put–call parity a long butterfly can also be created as follows ...
This is considered typically to be a "Market Maker/ Floor trader" strategy only, due to extreme commission costs of the multiple-leg spread. If the box is for example 20 dollars as per lower example getting short the box anything under 20 is profit and long anything over, has hedged all risk .
[1] If the options are purchased, the position is known as a long strangle, while if the options are sold, it is known as a short strangle. A strangle is similar to a straddle position; the difference is that in a straddle, the two options have the same strike price. Given the same underlying security, strangle positions can be constructed with ...
Options Clearing Corporation's (OCC) Options Symbology Initiative (OSI) mandated an industry-wide change to a new option symbol structure, resulting in option symbols 21 characters in length. March 2010 - May 2010 was the symbol consolidation period in which all outgoing option roots will be replaced with the underlying stock symbol. [1]