Reply To: Black Scholes option pricing

Ok, that much I understand. If you have a long, and buy a put at the money, then you are completely hedged against loss–minus the money you paid for the put. And you still have the gain potential.

My question is about calls and puts which are out of the money. Apparently it is believed (and this is the theoretical basis for black scholes), that you can always completely hedge an asset by selling calls even if they are way out of the money if you buy enough of them.

So that, perhaps you will need to by 18.64 calls, and also some debt, and then you will be completely hedged against your one share of stock. And that you will then adjust your hedge as more information comes out. This is what I don’t get.

(Then, they took this idea, and said that you can therefore figure out the correct price of the option, by figuring out how many options you’d need to sell, and then solving for x.)

And I didn’t respond before, because I thought you were kidding, because it seemed like you just wrote the same thing again from the other angle.