Hedge Pricing

In this section, we include the effect of trading fees on risk-neutral pricing, which we will denote with the variable ccc
. 
using ϕk\phi_kϕk​
 to denote the proportion of the hedge purchased for a given strike in a given epoch, the return for "selling" it can be shown as 
APRk=12×(1−c1−ϕk),APR_k=12\times\left(\frac{1-c}{1-\phi_k}\right),APRk​=12×(1−ϕk​1−c​),
and in order for a no-arbitrage environment, we must have the relation 
Pk=ϕk1−c.P_k=\frac{\phi_k}{1-c}.Pk​=1−cϕk​​.
It should be noted that although the APR for selling a hedge may seem quite high, there is always a probability PkP_kPk​
 of the seller's entire position being liquidated. 

Determining Strike Prices

Contracts & Audits

Last modified 8mo ago