Funding Options from the Market

Bell, Peter (2018): Funding Options from the Market.

Abstract

Investors face many different versions of The Portfolio Problem. Consider, for example, holding shares and call options on a publicly-traded equity. The options are in-the-money and live. How best should the investor go about exercising those options? They could fund from capital or use the secondary market to fund the options, as follows. When market price is above strike price, it may be possible to sell shares into market in advance of exercising the call options. This operation can yield residual cash or shares. How much should an investor do this and when? This paper presents a specific numerical example where we trade out of options when the market price breaches a 2:1 ratio to strike price and provides descriptive statistics for investors’ wealth in simulation with standard Gaussian motion for share price and specific trading rule.

• Item Type: MPRA Paper
• Language: English
• Keywords: Finance, Trading, Derivatives,
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C00 - General; G - Financial Economics > G0 - General > G00 - General

References

Bell, P. (2012). Goodness of fit test for the multifractal model of asset returns. Retrieved from https://ideas.repec.org/p/pra/mprapa/38689.html

Bell, P. (2014). On the optimal use of put options under trade restrictions. Retrieved from https://ideas.repec.org/p/pra/mprapa/62155.html

Carr, P. & Madan, D. (2001). Optimal positioning in derivative securities. Quantitative Finance, 1, 19-37.