Providing an overview of a number of option-trading strategies, situations in which they may be appropriate, and ways to implement them, this book is geared toward equity investors with limited option-trading experience who are looking to add option-trading strategies to their investing toolkits.
This is the first part of a two-part interview with Nobel Laureate Myron Scholes. In this installment, Scholes shared his perspectives on the Black-Scholes option pricing model, from the motivation and intuition of the original formula to the myriad of extensions.
In part two of this discussion, Kevin Harney discusses the effects of the critical assumptions in finance and what can be done differently.
Finance rests upon several critical assumptions that have logical holes. Among the assumptions are: Brownian motion and normally distributed outcomes. Here is a discussion of some of the effects caused by these assumptions.
The world is flat, or so people thought, until enterprising Greek philosophers challenged the notion in the 6th century BC. More than 2,000 years later, Ferdinand Magellan made a practical demonstration of that fact when he circumnavigated the globe. Although stocks in 2011 sailed through periods of sunshine, wind, and rain, many equities markets ended up flat just the same. Nonetheless, some investors proved that it is possible to make money in this market — and they did so writing covered calls.
The trading of options is quite mysterious to many investors. Some view the use of options as nothing more than gambling. One may place small bets with the potential for very large gains. Unfortunately, just like bets at a casino, the options trader who bets on a large move in the price of an asset is rarely the winner because most such bets expire worthless. As Kerry W. Given (a.k.a. Dr. Duke), founder of Parkwood Capital, points out in No-Hype Options Trading: Myths, Realities, and Strategies That Really Work, “The casino establishes a game where the casino holds a statistical edge. . . . Your model for trading options should be the casino owner, not the player at the tables.” His goal is to teach investors how to profit from the use of options while intelligently managing the risks involved.
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