Options Pricing Theoty [Wireless Investor]

This paper presents an intuitive approach to the pricing of options. The most important concept is that options should be priced in a way that does not allow arbitrage. Subsequent columns will look at investment strategies that use options. Some of these strategies are very conservative and others are extremely speculative. A good grasp of option pricing theory is very helpful when using option strategies, but this is far from being the whole story. Individual investors who buy and sell options incur very high transaction costs and cannot borrow at the risk-free rate. The high transaction costs erase the profit potential of a lot of options strategies. Fortunately, there are some options-based strategies that remain viable even after transaction costs are accounted for.