OPTION PRICING WHEN UNDERLYING STOCK RETURNS ARE DISCONTINUOUS*

A put option contract gives its holder the right to sell a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract. I. Buying puts to participate in downward price movements. Put options may provide a more attractive method than shorting stock for profiting on stock price declines, in that, with purchased puts, you have a known and predetermined risk. The most you can lose is the cost of the option. If you short stock, the potential loss, in the event of a price upturn, is unlimited. Another advantage of buying puts results from your paying...