Journal article
Managing option-trading risk when mental accounting influences prices
Journal of Risk, Vol.18(1), pp.71-89
2015
Abstract
The experimental evidence and opinions of market professionals suggest that mental accounting influences option prices. This paper explores the implications for risk management of mental accounting of a call option with its underlying. If mental accounting influences prices and the Black-Scholes approach is used, then, for inthe-money call options, delta risk is underestimated, gamma risk is overestimated and the extent of the time decay is underestimated. Covered-call writing is significantly more profitable with mental accounting than without it. Formulas for Greeks adjusted for mental accounting are put forward. © 2015 Incisive Risk Information (IP) Limited.
Details
- Title
- Managing option-trading risk when mental accounting influences prices
- Authors
- Hammad Siddiqi (Author)
- Publication details
- Journal of Risk, Vol.18(1), pp.71-89
- Publisher
- Incisive Media Ltd.
- Date published
- 2015
- DOI
- 10.21314/JOR.2015.304
- ISSN
- 1465-1211
- Organisation Unit
- School of Business and Creative Industries; University of the Sunshine Coast, Queensland; USC Business School - Legacy
- Language
- English
- Record Identifier
- 99450719302621
- Output Type
- Journal article
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- Business, Finance
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