In Table 5.1 the second line gives the gain expectation for buying ATM calls as 0.161 with the probability of a gain as 0.37. Assuming complete loss of investment is the complementary probability, what is the average return on this investment? What is the size of the Kelly bet?

Data given in table 5.1

Transcribed Image Text:

Table 5.11 Gain expectation for put and call options for the calls: So $80, T20(days), μ = 8%, r = 1%, o = 20% = Trade Strike Price (strike p/c) 75 call 80 call 85 call VS stock 85 put 80 put 75 put ITM 5.18 ATM 1.52 OTM 0.18 Time Amt Prob. of Prob. of value at total risk loss (%) 0.18 1.52 0.18 0.18 5.18 8 1.52 47 89 ITM 5.14 0.14 ATM 1.47 1.47 OTM 0.14 0.14 5.14 1.47 0.14 a gain (%) for the puts: So = $80, T = 20(days), μ =-4%, r = 1%, o = = 20% 9 47 91 51 37 10 Ex- pected gain 51 37 9 0.283 0.161 0.034 0.188 0.110 0.019 Gain rate (%) 100 193 344 67 137 249