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First caveat: I'm a programmer doing this for a client, and my knowledge of options probably has holes in it. So be a little forgiving here. =)

The Issue: When I run Black Scholes Newton against all options in a chain, I occasionally get NaN return values. My comparison for accuracy is against ThinkorSwim's numbers.

Here are screencaps of the issue: http://imgur.com/a/cItIj

spot, strike, time, etc, are all there. And most of the time the numbers are accurate. But once I hit certain ranges with Calls and Puts, I get those NaN's, and I can't seem to figure out the pattern as to why

I'm using garagebandhedgefund's code as a base, with adjustments for puts/calls.

Here's the Newton Code:

 public static double OptionPriceImpliedVolatilityCallBlackScholesNewton(double S, double K, double r, double time, double optionPrice,bool iscall, bool isput,out double price,out double diff)
    {
        price = 0;
        diff = 0;
        int MAX_ITERATIONS = 100;
        double ACCURACY = 1.0e-5;
        double t_sqrt = Math.Sqrt(time);
        double sigma = (optionPrice / S) / (0.398 * t_sqrt);    // find initial value  
         price = 0;
        for (int i = 0; i < MAX_ITERATIONS; i++)
        {
            if (iscall)
            {
                 price = OptionPriceCallBlackScholes(S, K, r, sigma, time);
            }
            if (isput)
            {
                 price = OptionPricePutBlackScholes(S, K, r, sigma, time);
            }
            diff = optionPrice - price;
            if (Math.Abs(diff) < ACCURACY)
                return sigma;
            double d1 = (Math.Log(S / K) + r * time) / (sigma * t_sqrt) + 0.5 * sigma * t_sqrt;
            double vega = (S * t_sqrt * NormDist(d1));
            sigma = sigma + diff / vega;
        }
        return sigma;  // something screwy happened, should throw exception  // <--- original code  
        //throw new Exception("An error occurred"); // Comment this line if you uncomment the line above  
    }

My question: Is it my code? Is it certain ranges of values? Are there cases where Newton fails to return valid values? I'm kinda stumped here.

For the record, when I use this data against garageband's Bisection code, I get errors across the board. I don't know if that's related. I'm fairly certain of the accuracy of my input data, since I do get some valid returns with Newton.

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Some option prices can't be converted to volatility. E.g. A bid for an in-the-money call which is below its intrinsic value. So sometimes NaN is a valid answer. Best way to handle it is to do precursory checks before going down to the search loop.

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.NET doubles return double.NaN when you do things like divide zero by zero. With doubles, anything less than double.Epsilon is "zero" for the purpose of this result.

I suggest that your vega is less than double.Epsilon

What happens if you run the same method using decimal instead?

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  • $\begingroup$ I converted everything to decimal, but just wound up with either 'divide by zero' or 'number too large/small for decimal' So the problem is with the Vega being generated. As a band-aid, I set minimum/maximum range checking. $\endgroup$ – The One Rob Nov 6 '14 at 17:03

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