👉 Disposition math is a method for determining the relative value of two options based on their expected cash flows and risk profiles, particularly useful in comparing options with different payoff structures or maturities. It involves calculating the present value of each option's expected cash flows and then adjusting for the risk (often measured by volatility) associated with each. The key step is to discount these cash flows to their present value using the risk-free rate and the option's volatility, then compare the results. The option with the higher present value difference is generally considered more favorable, assuming both have similar underlying asset values and maturities. This method helps investors make more informed decisions by accounting for the time value of money and risk, providing a more nuanced comparison than simple difference or ratio analysis.
