OPT_ON_OPTIONS

OPT_ON_OPTIONS theoretical price of options on options

Synopsis

OPT_ON_OPTIONS(type_flag,spot,strike1,strike2,time1,time2,rate,cost_of_carry,volatility)

Arguments

type_flag: 'cc' for calls on calls, 'cp' for calls on puts, and so on for 'pc', and 'pp'

spot: spot price

strike1: strike price at which the option being valued is struck

strike2: strike price at which the underlying option is struck

time1: time in years to maturity of the option

time2: time in years to the maturity of the underlying option

rate: annualized risk-free interest rate

cost_of_carry: net cost of holding the underlying asset of the underlying option

volatility: annualized volatility in price of the underlying asset of the underlying option

Note

For common stocks, cost_of_carry is the risk free rate less the dividend yield. time2time1