A Simple Formula for the Expected Rate of Return of an Option over a Finite Holding Period

Authors

  • MARK RUBINSTEIN

    Search for more papers by this author
    • Graduate School of Business Administration, University of California at Berkeley. The author would like to thank the National Science Foundation for funding.

ABSTRACT

Under conditions consistent with the Black-Scholes formula, a simple formula is developed for the expected rate of return of an option over a finite holding period possibly less than the time to expiration of the option. Under these conditions, surprisingly, the expected future value of a European option, even prior to expiration, is shown equal to the current Black-Scholes value of the option, except that the expected future value of the stock at the end of the holding period replaces the current stock price in the Black-Scholes formula and the future value of a riskless invesment of the striking price replaces the striking price. An extension of this result is used to approximate moments of the distribution of returns from an option portfolio.

Ancillary