Call and Put Option Pricing with Discrete Linear Investment Strategy

TL;DR

This paper develops closed-form formulas for pricing call and put options using a discrete linear investment strategy, making the model more applicable to real markets compared to continuous trading models.

Contribution

It introduces a discrete-time trading model for option pricing and derives explicit formulas, extending to stochastic interest rate models like Vasicek and Hull-White.

Findings

Closed-form formulas for option prices under discrete trading.

Extensions to stochastic interest rate models.

Feasible implementation for real market trading.

Abstract

We study the Option pricing with linear investment strategy based on discrete time trading of the underlying security, which unlike the existing continuous trading models provides a feasible real market implementation. Closed form formulas for Call and Put Option price are established for fixed interest rates and their extensions to stochastic Vasicek and Hull-White interest rates.