A Bramble-esq question.

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MrGecko

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The Stock of ABC Corp. has recently closed at $100.

You are offered a (european) Call option with a strike of $100, that matures at the close of tomorrow.

Your models suggest that at the end of play tomorrow, the stock has a 60% probability of closing at $101, and a 40% chance of closing at $99 (ABC Corp. is in an uptrend)

Assume interest rates are zero. How much do you bid for the option?
 
(60 cents - transaction costs) * (1/1+(the mean profit I want to make on a trade/100))
 
I'm not an expert on options, but if I understand it...

anything under 60c a share should have a positive expectancy. Assuming no transaction costs etc


So bid 0-59c inclusive, assuming I trust my models etc
 
I'll leave the question up for a while before explaining the answer, OK?

Keep your answers coming...!!!
 
No answer to the question but its morning and that is the ugliest gecko I've ever seen.
 
Good stuff - from now on, we can forget about transaction costs. Makes it a lot simpler.
 
MrGecko said:
I'll leave the question up for a while before explaining the answer, OK?

Keep your answers coming...!!!
Click to expand...

Guess I'm wrong then.

Deleted my explanatory post, better not be a lame ass "not enough info" or some BS.
 
nine said:
No answer to the question but its morning and that is the ugliest gecko I've ever seen.
Click to expand...

Better?

The 60% probability is based on a suitably sized sample you have taken.

No, the answer isn't 0 - 0.59
 
Ah I see the game here, assuming the strike is currently OTM we're going to be going short 5 outright as well as buying 6 options @ 5/6 aren't we... locking in guaranteed profit of $1...
 
arabianights said:
Ah I see the game here, assuming the strike is currently OTM we're going to be going short outright as well as buying 5 options @ 0.8 aren't we... locking in guaranteed profit of $1...
Click to expand...


Ah, knew it was some triksy ness.

Anyway, I will claim I'm correct, the question never said anything about the most profitable route, merely what the reader would do.

Moral Victory!
 
arabianights said:
Ah I see the game here, assuming the strike is currently OTM we're going to be going short outright as well as buying 5 options @ 0.8 aren't we... locking in guaranteed profit of $1...
Click to expand...

Close, but no Cigar.

Risk free profit? Come on...
 
Genics once you've posted your answer I'll explain, can't be ar$ed with creating some furore to make myself seem clever
 
my awnser? err..i havnt even the slighest clue how to solve this! know f all about options..

if it was a futures question..i'm your man!
 
I'll give you all a clue...

try and create a riskless portfolio, so that it doesn't matter where the stock closes tomorrow, you end up with the same...
 
As it appears this will end soon, I'll repost my maths.

Too late for me to be using triksy stuff ala Dave, I did simple honest maths...

Chance of winning * Profit - Chance of Losing * Cost = Expectancy

So...

0.6*(101-100-Price of option)-(0.4*Price of Option) = Expectancy

0.6 - (0.6+0.4)*(Price of option) = Expectancy

Set Expectancy = 0

0.6 = Price of Option.

0.6 gives you an expectancy of 0, anything under gives positive, anything over gives negative.

As I said originally, don't know much about options so I'm guessing that's where I went wrong.

Dave's idea didn't even occur to me, how bad is that, I thought I already had found the trick.
 
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