The hedge as a race between the loss in time value of the calls and the cash flow resulting from the adjustments

We might think of the hedge as a race between the loss in time value of the June 100 calls and the cash flow resulting from the adjustments, with the theoretical pricing model acting as the judge.

Under the assumptions of the model, if options are purchased at less than theoretical value, the adjustments will win the race; if options are purchased at more than theoretical value, the loss in time value will win the race.

The conditions of the race are determined by the inputs into the theoretical pricing model.


This is one of the many passages and charts I find in books and articles on a daily basis. They span many disciplines, including:

I occasionally add a personal note to them.

The whole collection is available here.