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Option prices as probabilities

  • Madan, D.
  • Roynette, B.
  • Yor, Marc
Registered author(s):

    Four distribution functions are associated with call and put prices seen as functions of their strike and maturity. The random variables associated with these distributions are identified when the process for moneyness defined as the stock price relative to the forward price is a positive local martingale with no positive jumps that tends to zero at infinity. Results on calls require moneyness to be a continuous martingale as well. It is shown that for puts the distributions in the strike are those for the remaining supremum while for calls, they relate to the remaining infimum. In maturity we see the distribution functions for the last passage times of moneyness to strike.

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    File URL: http://www.sciencedirect.com/science/article/B7CPP-4RY8SR4-1/1/3da282f835f96e823ad769a6e1e6e39b
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    Article provided by Elsevier in its journal Finance Research Letters.

    Volume (Year): 5 (2008)
    Issue (Month): 2 (June)
    Pages: 79-87

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    Handle: RePEc:eee:finlet:v:5:y:2008:i:2:p:79-87
    Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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    1. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
    2. Peter Carr & Helyette Geman & Dilip Madan & Marc Yor, 2004. "From local volatility to local Levy models," Quantitative Finance, Taylor & Francis Journals, vol. 4(5), pages 581-588.
    3. Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
    4. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    5. 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 637-54, May-June.
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