Hedging by Sequential Regression: An Introduction to the Mathematics of Option Trading

It is widely acknowledged that there has been a major breakthrough in the mathematical theory of option trading. This breakthrough, which is usually summarized by the Black-Scholes formula, has generated a lot of excitement and a certain mystique. On the mathematical side, it involves advanced probabilistic techniques from martingale theory and stochastic calculus which are accessible only to a small group of experts with a high degree of mathematical sophistication; hence the mystique. In its practical implications it offers exciting prospects. Its promise is that, by a suitable choice of a trading strategy, the risk involved in handling an option can be eliminated completely.