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Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition by Sheldon Natenberg

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 B

Some Useful Math

The mathematical functions and calculations referred to in this text are included in almost all commonly used spreadsheets, and for most traders, it is not necessary to know exactly how the calculations are made. Of far greater importance is the ability to interpret the numbers that result from the calculations.

For the reader who is interested, a detailed discussion of these mathematical concepts can be found in any good statistics or finance textbook. For convenience, we include an overview of these concepts and applications.

Rate-of-Return Calculations

An interest rate is the most common rate of return. The total interest can be computed in three ways: simple, compound, and continuous. If

then, for simple interest,

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