A Put Option Paradox

Mark Grinblatt and Herb Johnson

Journal of Financial and Quantitative Analysis, 1988, vol. 23, issue 1, 23-26

Abstract: What happens to the price of a put in a period during which the stock price stays constant? The hedging strategy implicit in the Black-Scholes model would seem to imply that the put goes up in value. Pure arbitrage arguments imply the opposite result. This paper resolves the paradox and uses it to explore the restrictions inherent in the diffusion processes assumed for all option pricing models.

Date: 1988
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