Stock Prices Follow a Brownian Motion

Abstract

This chapter starts by providing an introduction to the properties of a Brownian Motion and, specifically, a Geometric Brownian Motion. It continues with the derivation of the bid and ask prices of the European call and put options. After the derivation of the relevant formulas for the options’ bid and ask prices, the chapter moves on to the description of the financial data used to obtain the presented results. It continues to present a range of combined events that explains the increases in the illiquidity premium during the course of the option maturity.