The Skinny on Options: Abstract Applications

An Introduction to Utility Theory

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Finance and Economics will forever share a bond that cannot be broken, and in Economics, there is a bit of a catch-all term that is used to describe the satisfaction or pleasure derived from something: utility. Well as traders, if we apply the theory of utility to that of wealth creation, we arrive at a concave relationship that is effectively a subset of the larger concept that we saw with Prospect Theory.

And this relationship leads us to two important implications that could alter our trading, as our own wealth and available capital increase.

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