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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 long condor consists of four options of the same type (all calls or all puts). [1] The options at the outer strikes are bought and the inner strikes are sold (and the reverse is done for a short condor). [1] The difference between the two lowest strikes must be the same as the difference between the two highest strikes. [1]
The iron condor is an options trading strategy utilizing two vertical spreads – a put spread and a call spread with the same expiration and four different strikes. A long iron condor is essentially selling both sides of the underlying instrument by simultaneously shorting the same number of calls and puts, then covering each position with the purchase of further out of the money call(s) and ...
In options trading, a vertical spread is an options strategy involving buying and selling of multiple options of the same underlying security, same expiration date ...
Simple payoff diagrams of the four types of ladder. In finance, a ladder, also known as a Christmas tree, is a combination of three options of the same type (all calls or all puts) at three different strike prices. [1] A long ladder is used by traders who expect low volatility, while a short ladder is used by traders who expect high volatility.
For example, a bull spread constructed from calls (e.g., long a 50 call, short a 60 call) combined with a bear spread constructed from puts (e.g., long a 60 put, short a 50 put) has a constant payoff of the difference in exercise prices (e.g. 10) assuming that the underlying stock does not go ex-dividend before the expiration of the options.
[1] [2] A 'spread option' is not the same as an 'option spread'. A spread option is a new, relatively rare type of exotic option on two underlyings, while an option spread is a combination trade: the purchase of one (vanilla) option and the sale of another option on the same underlying.
At the specific time n, the model has a finite number of outcomes at time n + 1 such that every possible change in the state of the world between n and n + 1 is captured in a branch. This process is iterated until every possible path between n = 0 and n = N is mapped. Probabilities are then estimated for every n to n + 1 path.