# Tag Info

20

You may want to look at Chapter 5 - "The Quest for the Option Formula" from the Derivatives book. The book is available online for free and it has a very decent review of approaches that were used 20-30 years before the Black-Scholes-Merton equation.

13

The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble. ~ Ralph Waldo Emerson ~ Black-Scholes made it possible for an idiot with a calculator to imagine that he was smart enough to judge the value of options ... it has always been possible to determine option value -- ...

12

I think this slightly misses the point. Before Black-Scholes options prices were set entirely by human judgement, just like prices in many other markets are set, which is why this model was so important. Peter Bernstein has a good recollection of this kind of behavior in "Capital Ideas".

10

Options and futures were common instruments in France at the end of the 19th century. Louis Bachelier, in his 1900 thesis, derives the price of a European option when the underlying asset is normally distributed. Interestingly, he seems to have some strong opinions about mathematical finance in his introduction to his thesis: The calculus of ...

10

There is a missing link to early options pricing literature which had been overlooked. Put-call parity along with static delta hedging were understood in actionable detail well before BSM and trading and risk management were accomplished through heuristic methods which indeed continued to be used after BSM. Would point to "Why we Have Never Used the ...

7

I dusted off my oldest option theory books and searched the indexes for "vega". The oldest reference I found was in Option Volatility and Pricing Strategies (1st ed.) by Sheldon Natenberg, copyright 1988. When discussing the sensitivity of prices to volatility (p. 132), he says, [T]here is no single commonly accepted term for this number. It is ...

6

You can get quite a bit of structured data for free from the SEC's Edgar system via XML: http://www.sec.gov/edgar/quickedgar.htm http://xbrl.sec.gov/ Even the older stuff that's not xml based, is fairly readily parsable. Another source that is easier to deal with, but not free, and possibly expensive, is CapitalIQ (where Yahoo Finance gets their data ...

6

To add on to what others have said: the formula still does not provide a price -- just a way to calculate "implied" volatility. The BSM calculates a hypothetical value (using binary branchings as the storytelling tool) and this hypothetical merely provides a reference for this common "what-if" question. The only sense in which "arbitrage free" entered the ...

6

Ed Thorp is of the opinion that he could price options properly before Fischer and Myron: link here (doc) Sounds like he was using a risk-neutral approach

5

You find lots of info in part 3 "(3. Myth 1: people did not properly “price” options before the Black–Scholes–Merton theory)" of this paper: "Option traders use (very) sophisticated heuristics, never the Black–Scholes–Merton formula": http://linkinghub.elsevier.com/retrieve/pii/S0167268110001927 (a free preprint can be found here Page 217) Another source ...

5

I have no reference, but it's largely phonetic. Must variables in econ/finance are Greek versions English letter you'd want to use. $\omega$ for weight, $\rho$ for rate, $\epsilon$ for error, and so. Vega is partial derivative of price with respect to V olatility. But there's no Greek letter for V. Vega sounds kind of Greek.

4

The Early History of Option Contracts Haven't read this so can't vouch for whether they get into etymology. ABSTRACT: This chapter discusses the history of option contracts from ancient times until the appearance of Theorie der Prämiengeschäfte by Vincenz Bronzin in 1908. The history examines the use of contracts with option features prior to the ...

3

If you're looking for free data, I've heard this question many times asked to derivatives professors at the end of a lesson. They answered was most of the time to step by their offices so that they could give data they imported from the university data provider. So apparently, if even academy has to do it this way, I'd be surprised if you found. This post ...

3

what you are trying to do is not recommended; especially in FX market. here is why: - The spread changes depending on time of day and trading venue. - FX market is based on quotes. What you see is not what you get. This also depends on the broker you are using. - FX market changes all the time; hence the spread today; may be different than same day last ...

2

One of the largest misconceptions of derivatives is that they destroy wealth. In fact, derivatives cannot destroy wealth by their construction, rather, they merely transfer wealth from one party to another. This is because generally, derivatives are voluntary contracts between two parties, where one side's gain exactly matches the other's loss. The ...

1

Although I think your question will be flagged for "basic knowledge" you can find free sources for this data including Yahoo Finance, Quandl. Commercial data vendors also provide this information. However, you really need to define what sort of data you are trying to find. Spot prices (for physical delivery), spot prices (for cash settled) or futures data ...

1

The specific procedure depends on details of the problem such as What is the objective function? Sharpe ratio? Terminal wealth? What is the model of transaction costs? What is the data resolution? (If it's very high the problem may become challenging computationally). There are many papers, e.g. this one, that solve various problems of this sort. These ...

1

you can smooth your data and then find the zeros of the slope of the smoothed data. You can adjust for the costs with the degree of smoothing.

1

I think what you're trying to do is to construct a portfolio from inside out, i.e. picking stocks based on idiosyncratic factors. I have never heard anyone (within the industry) succeed with this, and, to my knowledge, the literature in this direction is pretty slim. The main reason is that in finance, the Markowitz approach is dominant to this day. Put ...

Only top voted, non community-wiki answers of a minimum length are eligible