Option strategies with linear programming
In practice, all option strategies are decided in advance, given the investor’s belief of the stock price. In this paper, instead of deciding in advance the most appropriate hedging option strategy, an LP problem is formulated, by considering all significant Greek parameters of the Black-Scholes formula, such as delta, gamma, theta, rho and kappa. The optimal strategy to select will be simply decided by the solution of that model. The LP model is applied to Ericsson’s call and puts options.
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- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.