How do you price a Selectr option?

Calculations made in the article confirmed that if the choice time of contract is the current date the value of a chooser option is equal to the value of the simple call option. If the choice time is equal to one, the chooser value equals the value of a straddle strategy.

What is a European call option?

Call. A European call option gives the owner the right to acquire the underlying security at expiry. For an investor to profit from a call option, the stock’s price, at expiry, has to be trading high enough above the strike price to cover the cost of the option premium.

How do you calculate the value of a call option?

You can calculate the value of a call option and the profit by subtracting the strike price plus premium from the market price. For example, say a call stock option has a strike price of $30/share with a $1 premium, and you buy the option when the market price is also $30. You invest $1/share to pay the premium.

How do you hedge a barrier option?

First, hedge the up-and-out call at expiry with two regular options: one with the same strike as the barrier option to replicate its payoff below the barrier and another to cancel out the payoff of the regular call at the barrier. Second, compute the value of the hedging portfolio the preceding period.

How does a chooser option differ from an options straddle?

A Chooser Option will be cheaper than a straddle strategy (buying a call and a put at the same strike) as after the chooser date, the buyer has only one option. The Chooser will always be more expensive than a straight Call or Put as the buyer has more flexibility.

What happens if my call option expires in the money?

If your call options expire in the money, you end up paying a higher price to purchase the stock than what you would have paid if you had bought the stock outright. You are also out the commission you paid to buy the option and the option’s premium cost.

What is a long butterfly strategy?

A long butterfly spread with calls is a three-part strategy that is created by buying one call at a lower strike price, selling two calls with a higher strike price and buying one call with an even higher strike price. All calls have the same expiration date, and the strike prices are equidistant.