The Intelligent Option Investor by Erik Kobayashi-Solomon

Author:Erik Kobayashi-Solomon
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2015-04-07T04:00:00+00:00

Here I have eyeballed (and sometimes done a quick extrapolation) to try to get the price that is closest to the 84-delta, 50-delta, and 16-delta marks, respectively. Of course, you could calculate these more carefully and get exact numbers, but the point of this is to get a general idea of how likely the market thinks a particular future stock price is going to be.

Comparing an Intelligent Valuation Range with a BSM Range

The point of this book is to teach you how to be an intelligent option investor and not how to do stochastic calculus or how to program a computer to calculate the BSM. As such, I’m not going to explain how to mathematically derive the BSM cone. Instead, on my website I have an application that will allow you to plug in a few numbers and create a graphic representation of a BSM cone and carry out the comparison process described in this section. The only thing you need to know is what numbers to plug into this web application!

I’ll break the process into three steps:

1. Create a BSM cone.

2. Overlay your rational valuation range on the BSM cone.

3. Look for discrepancies.

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