Evaluating a Call Option and Optimal Timing Strategy in the Stock Market

Howard M. Taylor
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Howard M. Taylor: Cornell University

Management Science, 1967, vol. 14, issue 1, 111-120

Abstract: The optimal strategy for the holder of a "put" or "call" option contract in the stock market is studied under the random walk model for stock prices. Some results are distribution-free in that they depend only on the mean price change. Other results are derived under the assumption that price changes have a normal or Gaussian distribution. Under this assumption explicit results are obtained for the limiting case where the expiration date of the contract is indefinitely far in the future. Knowing the optimal strategy it is possible to evaluate whether the purchase of a given option can be expected to be profitable.

Date: 1967
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:14:y:1967:i:1:p:111-120

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