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

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 8

Dynamic Hedging

From our discussion thus far, it ought to be obvious why serious option traders use theoretical pricing models. First, a model tells us something about an option’s value. We can compare this value with the price of the option in the marketplace and from this choose an appropriate strategy. Second, once we have taken a position, the model helps us quantify many of the risks that option trading entails. By understanding these risks, we will be better prepared to minimize our losses when market conditions move against us and maximize our profits when market conditions move in our favor.

In discussing the performance of a theoretical pricing model, it is important to remember that all models are probability based. Even if we assume ...

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