Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It only takes a minute to sign up.
Sign up to join this community
If I am trying to price a strategy, say for example a call spread where we are long a call, strike L and short a call strike M, would the pricing formula simply be the Black-Sholes price for the Call at Strike L subtract the Black Scholes price for a call at Strike M?
Is it really that simple or am I missing something?
Furthermore, the Delta would be 0 when the price is < l or > m, but in between l and m, would it just be the average of each leg?
That is correct and actually many of the proofs in option pricing use this concept in order to arrive at a price, for example, by using a replicating portfolio of some stock and bonds, we can adjust our portfolio weights such that the payoff is exactly the same as an option, therefore by no arbitrage principles, this portfolio must be the same as the option. Similar principle here, you have a spread strategy which can be constructed by two calls, so the cost should be just the cost of individual constituents.
