A portfolio theory based attempt to optimize the decision making process of investing in options.

Abstract

The proposed model is trying to apply the portfolio theory to Black-Scholes-Merton options pricing model by calculating the modified Sharpe ratio for them. Having shown most of such approach drawbacks a contra proposal is offered. Knowing the investor’s vision of the future market’s moves and their risk attitude a real value is given to every option profit by using a modified Kahnemann-Tversky based function. The values are then adjusted with the assumed distribution to analyze the expected utility. In this model the investor should make the decision basing on this criterion solely.