Questions about models for the valuation of option contracts.
8
votes
3answers
3k views
How should I calculate the implied volatility of an American option in a real-time production environment?
There are many models available for calculating the implied volatility of an American option. The most popular method, employed by OptionMetrics and others, is probably the Cox-Ross-Rubinstein model. ...
23
votes
4answers
917 views
Are there any new Option pricing models?
Back in the mid 90's I used the Black-Scholes Model and the Cox-Ross-Rubenstein (Binomial) Model's to price Options. That was nearly 15 years ago and I was wondering if there are any new models being ...
5
votes
1answer
210 views
How to value a floor when a loan is callable?
Certain bank loans pay a spread above a floating-rate interest rate (typically LIBOR) subject to a floor. I would like to find the value of this floor to the investor. Assume for this example that ...
15
votes
6answers
5k views
What are some useful approximations to the Black-Scholes formula?
Let the Black-Scholes formula be defined as the function $f(S, X, T, r, v)$.
I'm curious about functions that are computationally simpler than the Black-Scholes that yields results that approximate ...
7
votes
2answers
1k views
Are there comprehensive analyses of theta decay in weekly options?
Are there comprehensive analyses of how much theta a weekly options loses in a day, per day?
I know what the shape of theta decay looks like, in theory, where the decay towards zero happens more ...
10
votes
7answers
2k views
Why does implied volatility show an inverse relation with strike price when examining option chains?
When looking at option chains, I often notice that the (broker calculated) implied volatility has an inverse relation to the strike price. This seems true both for calls and puts.
As a current ...
8
votes
2answers
594 views
How does volatility affect the price of binary options?
In theory, how should volatility affect the price of a binary option? A typical out the money option has more extrinsic value and therefore volatility plays a much more noticeable factor. Now let's ...
6
votes
1answer
241 views
How to reduce variance in a Cox-Ingersoll-Ross Monte Carlo simulation?
I am working out a numerical integral for option pricing in which I'm simulating an interest rate process using a Cox-Ingersoll-Ross process. Each step in my Monte Carlo generated path is a ...
3
votes
2answers
359 views
Debunking risk premium via “hedging” argument? (or why even in the real world $\mu$ should equal $r$)
Since I began thinking about portfolio optimization and option pricing, I've struggled to get an intuition for the risk premium, i.e. that investors are only willing to buy risky instruments when they ...
4
votes
1answer
338 views
How to apply quasi-Monte Carlo to path-dependent options?
Following up on my recent question on variance reduction in a Cox-Ingersoll-Ross Monte Carlo simulation, I would like to learn more about using a quasi-random sequence, such as Sobol or Niederreiter, ...
3
votes
4answers
549 views
Ways of treating time in the BS formula
The Black-scholes formula typically has time as $\sqrt{T-t}$ or some such. My questions:
What is the granularity of this? If we treat $t$ as the number of days, then logically on the day of expiry, ...
1
vote
1answer
258 views
Calculating Theta assuming other variables remain the same
Is there any way to calculate theta at X day in future based solely on knowing
1) Total Current Option Price
2) Days Till Expiration
How would this be done? Thank you
