Abstract
Equity options offer a special type of vehicle for creating and manipulating payout profiles. The profile is quite different from that used to show the profit or loss regions associated with long and short futures positions. What makes the application of options so attractive is that they can be regarded as a set of easily understood building blocks that can be combined in many ways to engineer positions that will deliver a desired payout at some defined future point in time. One way of judging whether an option, or for that matter any other instrument, is mispriced is to replicate its structure. Using options in conjunction with other instruments will enable new classes of instruments to be developed and these instruments in turn can be used to satisfy the demands of the investing public. The seller of the option is known as writing an option.
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