Hi all,
Example 14 D of the ASM Manual gives:
For a gap call option:
If K = 60, Option prem = 3.45
If K = 70, Option prem = .81
Question 2 asks: Determine the strike price such that the option premium is 0.
first they find slope, which I also was able to solve for: (.81 - 3.45)/(70-60) = -.264
Then to solve for x they say:
.81 - .264(x-70) = 0.
Solving for x yields x=73.07.
Can someone explain to me how the bolded formula was determined to be the correct formula to use, and what a generic formula would be to be used in similar examples?
Example 14 D of the ASM Manual gives:
For a gap call option:
If K = 60, Option prem = 3.45
If K = 70, Option prem = .81
Question 2 asks: Determine the strike price such that the option premium is 0.
first they find slope, which I also was able to solve for: (.81 - 3.45)/(70-60) = -.264
Then to solve for x they say:
.81 - .264(x-70) = 0.
Solving for x yields x=73.07.
Can someone explain to me how the bolded formula was determined to be the correct formula to use, and what a generic formula would be to be used in similar examples?
Slope of Gap Options
