Chapter 03 · Section 3.1

Call value as a function of the underlying

Each possible value of the current underlying has a corresponding probability distribution function for the underlying value at the expiration date of the option :

-yellow line for an underlying of 35
-pink line for an underlying of 40
-green line for an underlying of 45
-white line for an underlying of 50

One can see that when the current underlying value increases, the probability density function is shifted to the right, that is towards higher underlying values. This means that the expected gain increases when the current underiying value increases.