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Probability of Exercise of Option

Author

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  • Stolorz Beata

    (Department of Econometrics and Statistics Faculty of Economics and Management, University of Szczecin, Mickiewicza 64, 71-101 Szczecin)

Abstract

To estimate the risk the investors take when investing their money in stocks or stock options one must study if the option is exercised or not. From the point of view of a call option writer, especially those uncovered, one should study the probability of the exercise of option by a holder. The method presented in the paper enables to estimate risk connected with investment in options. In the assessment of risk that is born when investing money in stocks or options it is interesting whether the option will be exercised or not. From the writers' point of view, particularly those without coverage, it could be necessary to analyse probability of the exercise of options by buyers. The described method allows to assess at any time of call option duration whether the investor can be certain of the result of their investment. It can be applied also for the option strategies. In the paper the author has attempted to estimate the risk of call option and to estimate the probability of profit achievement in the case of long strangle option application. Investors using option strategies are able to do preliminary analysis of options and to minimize risk of their investment through choosing a proper date and price of exercise.

Suggested Citation

  • Stolorz Beata, 2007. "Probability of Exercise of Option," Folia Oeconomica Stetinensia, Sciendo, vol. 6(1), pages 1-14, January.
    • Handle: RePEc:vrs:foeste:v:6:y:2007:i:1:p:1-14:n:1
    DOI: 10.2478/v10031-007-0001-8
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