Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 13

Covering the Naked Put

Pricing an exchange-traded option requires the use of a complex mathematical formula. The mathematical model is driven by six basic factors:

1. Current price of the underlying

2. Strike price of the option

3. Time till expiry

4. Dividends

5. Interest rates

6. Volatility

Looking at the six components, you can know with near certainty what most of the inputs ought to be. You know, for example, exactly what the current price of the underlying is. The strike price of the option is an element of the option contract. You know specifically when the option contract is set to expire (exchange-traded options in general expire on the Saturday following the third Friday of the expiration month). You also have a high degree ...