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Author: TheNajdorfDefens Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 15030  
Subject: Re: MMM - An Option Strategy Date: 9/5/2005 3:49 PM
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but Naj is exactly right, a simple binominal pricing model would do the trick if one were able to make one very small alteration. I hope someone reads this.... what would happen to an option pricing model on MMM if you assumed the equity simply would not fall below 60 during the life of the option

that would have exactly the effect I was thinking about... the closer you get to 60, the more compressed "true" put values would be. If you assume MMM cannot go below 60, then any put below 60 would have a negative value regardless of price and should be sold

But this is absurdly simple, isn't it?

You build your tree with your vols and probs. Although it's recursive, you manually enter the value off MMM<60 as MMM=60 for those nodes so affected.

Problem solved....I think.

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