Funding Options from the Market

Peter Bell

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Finance; Trading; Derivatives (search for similar items in EconPapers)
JEL-codes: C00 G00 (search for similar items in EconPapers)
Date: 2018-10-05
New Economics Papers: this item is included in nep-cmp and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:89360

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