What are upper and lower bounds of options PDF

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What are upper and lower bounds of options? One important principle while valuing options is that at any time, the value of a call or a put cannot exceed certain limits – on the higher side as well as on the lower side. In option lingo, the maximum limit up to which an option value can go on the higher side is commonly referred to as ‘upper bounds of an option’ and the maximum limit below which an option value cannot fall is called the ‘lower bounds of an option’. These maximum limits will have to be discussed for upper and lower options separately.

Options traded all over the world are divided into two broad styles called American options and European options. What’s the difference? An American option can be ‘exercised’ any time before the option expiry. European options can be exercised only on the expiry date. So, if you have bought a call American style option, you can exercise your right to buy underlying asset anytime between the purchase date and expiry date. Similarly If you have bought a Put American style option, you can exercise your right to sell the underlying asset anytime between the purchase date and expiry date But in the case you have bought a call/put European style option, you can exercise your right to buy/sell underlying asset only on the expiry date. f X = strike price, the upper bound for a American put option is P...