Advanced Option Pricing Models

COVER......Page 1
Terms of Use......Page 3
Want to learn more?......Page 4
Trademarks and Service Marks......Page 6
Contents......Page 7
Acknowledgments......Page 11
Introduction......Page 12
Thinking Out of the Box......Page 13
Improving Option Pricing Strategies: A Scientific Investigation......Page 15
Assumptions Made by Popular Models: Are They Correct?......Page 16
What Is Covered in the Chapters?......Page 18
Who Will Benefit?......Page 27
Tools and Materials Used in the Investigation......Page 28
An Invitation......Page 29
Basic Options: Calls and Puts......Page 30
Naked and Covered......Page 32
Additional Option Terminology......Page 33
Factors Influencing Option Premium......Page 34
Option Pricing Models......Page 39
Graphic Illustrations......Page 44
Put-Call Parity, Conversions, and Reversals......Page 55
Synthetics and Equivalent Positions......Page 57
Summary......Page 59
Suggested Reading......Page 61
Defining Fair Value......Page 62
The Context Dependence of Fair Value......Page 64
Fair Value and Arbitrage......Page 67
Fair Value and Speculation......Page 69
Estimating Speculative Fair Value......Page 70
Suggested Reading......Page 81
Popular Option Pricing Models......Page 82
The Cox-Ross-Rubinstein Binomial Model......Page 83
The Black-Scholes Model......Page 99
Means, Medians, and Stock Returns......Page 105
Summary......Page 109
Suggested Reading......Page 112
Statistical Moments of Stock Returns......Page 114
The First Four Moments......Page 115
Empirical Studies of Moments of Returns......Page 119
Study 1: Moments and Holding Period......Page 123
Study 2: Moments and Day of Week......Page 139
Study 3: Moments and Seasonality......Page 144
Study 4: Moments and Expiration......Page 152
Summary......Page 156
Suggested Reading......Page 157
Measurement Reliability......Page 158
Model Complexity and Other Issues......Page 161
Empirical Studies of Volatility......Page 162
Study 1: Univariate Historical Volatility......Page 165
Study 2: Bivariate Historical Volatility......Page 175
Study 3: Reliability and Stability......Page 181
Study 4: Multivariate Prediction......Page 186
Study 5: Implied Volatility......Page 194
Study 6: Historical and Implied Volatility Combined......Page 197
Study 7: Reliability of Implied Volatility......Page 204
Summary......Page 207
Suggested Reading......Page 209
Pricing Options with Conditional Distributions......Page 210
Degrees of Freedom......Page 211
General Methodology......Page 213
Study 1: Raw Historical Volatility......Page 214
Study 2: Regression-Estimated Volatility......Page 223
Study 3: Re-Analysis with Detrended Distributions......Page 233
Study 4: Skew and Kurtosis......Page 238
Study 5: Trading Venue......Page 249
Study 6: Stochastic Crossover......Page 255
Summary......Page 266
Suggested Reading......Page 269
Continuous, Nonlinear Functions......Page 270
Polynomial Regression Models......Page 273
Neural Network Models......Page 276
Hybrid Models......Page 282
General Overview......Page 286
Data......Page 287
Software......Page 288
Study 1: Neural Networks and Black-Scholes......Page 289
Study 2: Polynomial Regressions and Black-Scholes......Page 300
Study 3: Polynomial Regressions on Real-Market Data......Page 306
Study 4: Basic Neural Pricing Models......Page 321
Study 5: Pricing Options with a Hybrid Neural Model......Page 330
Summary......Page 339
Suggested Reading......Page 342
Volatility Revisited......Page 344
Study 1: Volatility and Historical Kurtosis......Page 345
Study 2: Volatility and Historical Skew......Page 352
Study 3: Stochastic Oscillator and Volatility......Page 356
Study 4: Moving Average Deviation and Volatility......Page 363
Study 5: Volatility and Moving Average Slope......Page 367
Study 6: Range Percent and Volatility......Page 371
Study 7: Month and Volatility......Page 375
Study 8: Real Options and Volatility......Page 379
Summary......Page 390
Suggested Reading......Page 393
Option Prices in the Marketplace......Page 394
Study 1: Standard Volatility, No Detrending......Page 395
Method......Page 396
Results......Page 399
Summary......Page 409
Defining Fair Value......Page 412
Popular Models and Their Assumptions......Page 413
Mathematical Moments......Page 415
Volatility......Page 420
Conditional Distributions......Page 423
Pricing Options Using Nonlinear Modeling......Page 427
Volatility Revisited......Page 429
Option Prices in the Marketplace......Page 430
Summary......Page 431
Notice: Companion Software Available......Page 434
Bibliography......Page 436
Index......Page 440