Building a model

F

ferrycorsten

1. Do you price one option at a time? Or can you price something like a chain simultaneously?

2. Fischer Black Pseudo-American or Binomial (for American options)?

3. Any other advice for a first-time modeler?
 
Sorry to bring this up again but I could really use some help fellas.

Specifically, if you use BSM, how do you adjust for dividends and early exercise? Does anyone use binomial? Are macros and VBA necessary for a killer model? I want to build something that could price a whole chain, or at least 5 or 6 options at a time. This is only feasible with BSM, not binomial right?
 
Simple B/S is usually enough. Before you start building something, what is it that you are trying to model? E.g. are you building a relative volatility model?
 
Quote from sle:

Simple B/S is usually enough. Before you start building something, what is it that you are trying to model? E.g. are you building a relative volatility model?
More...

Thanks sle. I want to generate theoretical values based on vol input. Ideally I'd like to do this for multiple options at once, so I can compare for example butterflies at different strikes and easily see which one gives me the best theoretical edge.

Are you saying that standard BSM is adequate for evaluating American options? That getting the exact price doesn't really matter, it's the pricing compared to other options that counts, right?

I'm really hoping to sharpen my excel skills through this endeavor and become decent at manipulating data. But I know nothing about macros or VBA.

I read Natenberg twice, and reading Baird now, so you can see where I'm hoping to go with this. I want to focus on volatility.
 
Quote from ferrycorsten:

1. Do you price one option at a time? Or can you price something like a chain simultaneously?

2. Fischer Black Pseudo-American or Binomial (for American options)?

3. Any other advice for a first-time modeler?
More...


Honestly ... unless you really have you ... there are better things to do with your life .... and I am talking from experience.

I trade UK Index/Equity Options on Euronext and used Hoadley until he stopped supporting option chains from LIFFE ... although he has lots of ready made functions to download / calibrate / analyse most other option chains.

So I set to developing my own Excel based system that does pretty much the same job ... outsourcing some of the development work to a local excel guru ...

Much of the effort goes into cleaning up the data and calibrating Vols / Skews ... from memory I think one of Filthy's books shows how you can use Excel Solver to calibrate option prices .... and Espen Haug's book will give you VBA code for just about every model out there ...

But if you have access to TOS / LiveVol etc ... why put yourself through all that pain!!

Cheers
James
 
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