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In fact, the Black–Scholes formula for the price of a vanilla call option (or put option) can be interpreted by decomposing a call option into an asset-or-nothing call option minus a cash-or-nothing call option, and similarly for a put—the binary options are easier to analyze, and correspond to the two terms in the Black–Scholes formula.
The first application to option pricing was by Phelim Boyle in 1977 (for European options). In 1996, M. Broadie and P. Glasserman showed how to price Asian options by Monte Carlo. An important development was the introduction in 1996 by Carriere of Monte Carlo methods for options with early exercise features.
From the viewpoint of the option issuer, e.g. an investment bank, the gamma term is the cost of hedging the option. (Since gamma is the greatest when the spot price of the underlying is near the strike price of the option, the seller's hedging costs are the greatest in that circumstance.)
The options trader makes a profit of $200, or the $400 option value (100 shares * 1 contract * $4 value at expiration) minus the $200 premium paid for the call.
Option-adjusted spread (OAS) is the yield spread which has to be added to a benchmark yield curve to discount a security's payments to match its market price, using a dynamic pricing model that accounts for embedded options. OAS is hence model-dependent.
The Black formula is easily derived from the use of Margrabe's formula, which in turn is a simple, but clever, application of the Black–Scholes formula. The payoff of the call option on the futures contract is max ( 0 , F ( T ) − K ) {\displaystyle \max(0,F(T)-K)} .
Here's a quick look at the somewhat unique covered-call-writing ETF with a generous 4.6% yield. ... picking and choosing the best covered call options to write, and when, across its entire stock ...
The Global X S&P 500 Covered Call ETF's yield is an eye-catching 9.2%. But think about that yield for one second: It's nearly as high as the roughly 10% average return investors expect from the S ...