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Returns of options

MonteCristo

Joined
6/20/11
Messages
25
Points
11
Hi all,

Someone has told me about a way to compute returns for options (1 month Call option on the SP500) by calculating another 2 months option on the same underlier and then using a formula .. but I don't recall the thing.
The aim is to avoid the undefined ln(0) when using payoffs
Thanks
 
What is undefined ln(0)? I'd do this in such way: Take logarithmic returns on the 2 month option underlying, simulate those increments(logarithmic) for brownian motion to recover ST and use those ST-s to find the 1 month option price. But what do you mean in undefined ln(0) here? Or if you only have the price of another 2 month option and no underlying data ?
 
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