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Understanding LEAPS: Using the Most Effective Options Strategies for Maximum Advantage by Allaire

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CHAPTER 19Option Pricing

The same year that the Chicago Board Options Exchange first traded listed equity options, two University of Chicago professors published a paper in which they presented what is now recognized as the first mathematical equation that purported to estimate the value of equity options. The year was 1973; the professors were Fisher Black and Myron Scholes.

Our intent in this chapter is not to fully dissect the Black-Scholes Option Pricing Model or any of its successors and/or competitors, but to review the inputs into these various equations, why they make sense, and their relative importance, especially as they pertain to LEAPS.

THE VARIABLES—FIRST OVERVIEW

When analyzing the Black-Scholes equation, or any other option pricing ...

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