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

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 5

Theoretical Pricing Models

In Chapter 4, we considered the value of an option and the profit or loss resulting from an option strategy at the moment of expiration. From the expiration profit and loss (P&L) graphs, we can see clearly that the direction in which an underlying contract moves can be an important consideration in choosing an option strategy. A trader who believes that the underlying market will rise will be more inclined either to buy calls or sell puts. A trader who believes that the underlying market will fall will be more inclined either to buy puts or sell calls. In each case, the directional movement in the underlying market will increase the likelihood that the strategy will be profitable.

However, an option trader has an ...

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