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A Put Option Paradox

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  • Grinblatt, Mark
  • Johnson, Herb

Abstract

What happens to the price of a put in a period during which the stock price stays constant? The hedging strategy implicit in the Black-Scholes model would seem to imply that the put goes up in value. Pure arbitrage arguments imply the opposite result. This paper resolves the paradox and uses it to explore the restrictions inherent in the diffusion processes assumed for all option pricing models.

Suggested Citation

  • Grinblatt, Mark & Johnson, Herb, 1988. "A Put Option Paradox," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(1), pages 23-26, March.
    • Handle: RePEc:cup:jfinqa:v:23:y:1988:i:01:p:23-26_01
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    Cited by:

    1. Poon, Winnie P. H. & Duett, Edwin H., 1998. "An empirical examination of currency futures options under stochastic interest rates," Global Finance Journal, Elsevier, vol. 9(1), pages 29-50.
    2. Sherrick, Bruce J. & Irwin, Scott H. & Forster, D. Lynn, 1990. "Nonstationarity Of Soybean Futures Price Distributions: Option-Based Evidence," Illinois Agricultural Economics Staff Paper 244666, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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