FPM, the successor to the BSM option pricing model

thecoder

thecoder

FPM, the successor to the BSM option pricing model

The Black-Scholes-Merton (BSM) option pricing model exists since 1973/1976.

I recently have found bugs in it, and have even developed a mathematically
correct replacement/successor model, called "FPM".

This journal is to document the development of this new option pricing model.
Ie. this is a research related journal.

My other journal is about the FairPUT option type which is a third option type
besides CALL and PUT. It can freely replace PUT, or all 3 can co-exist in the market.
A long trader would prefer FairPUT over PUT because FairPUT has a higher payoff
than PUT, though both cost the same --> The FairPut Initiative (also research related like this one).
The FairPUT option type is optional in both BSM as well in FPM.

FPM stands for "FairPut Option Pricing Model", but as said above: the FairPUT type is just optional besides CALL and PUT.

Constructive contributions welcome.
 
Last edited:
The very first comparative FPM result was posted in the other journal on Aug 31, 2020
https://www.elitetrader.com/et/threads/the-fairput-initiative.349291/page-11#post-5191774
Ie.
thecoder wrote
Code: 
Here's the first result:

Black-Scholes-Merton (BSM) option pricing model:
BSM(S=100, K=100, t=1, s=30%, r=0%, q=0%):
  CALL=11.923538474048 PUT=11.923538474048

FairPut option pricing model (FPM):
FPM(S=100, K=100, t=1, s=30%, r=0%, q=0%):
  CALL=11.791142218895 PUT=11.791142218895

As can be seen, there is a difference between BSM and FPM, even with r=q=0.
I'm sure that FPM is correct since the maths behind it is solid.
And if FPM is correct, then of course BSM can only be wrong...

Btw, this also reveals/discloses the true meaning of the "crypto" in the original posting. :)
For the meaning of the mentioned "crypo" see the initial posting at https://www.elitetrader.com/et/threads/the-fairput-initiative.349291/
and compare the numbers with the above numbers :-)
 
JamesJ said:
New Week, new (monologue-ish) thread by thecoder...

Why not just write a paper and submit it to the journal of quantitative finance...
More...

Why does it bother you? This is my journal, my blog, I chose it to do here first.
Yes, a paper and/or maybe a book :) will come too,sometime later.
First I will setup a virtual stock & options exchange to test it all in practice.
This will of course take some months as it's a big thing with servers, web, API, coding, etc. etc.
 
Last edited:
jys78 said:
I prefer the WAP model.
More...
Can you elaborate?
Do you rather mean the "Volume Weighted Average Price (VWAP)"?
But that one is usually for the underlying instrument, and usually not for options, if I'm not mistaken.
 
thecoder said:
Why does it bother you?
More...

Because if you have truly made an advancement in derivatives pricing, you are wasting your time and ours by posting on an anonymous trading forum. You are not even posting your results at Wilmott. Submitting a paper and getting it accepted at an established peer reviewed journal will get you some credibility with actual industry professionals. Posting on ET gets you laughed at.
 
panzerman said:
Because if you have truly made an advancement in derivatives pricing, you are wasting your time and ours by posting on an anonymous trading forum. You are not even posting your results at Wilmott. Submitting a paper and getting it accepted at an established peer reviewed journal will get you some credibility with actual industry professionals. Posting on ET gets you laughed at.
More...
True, but somewhere I had to start, and it just was ET :)
In the beginning I was of course unsure and needed some feedback whether I'm on something or not, on the right track or not etc. etc.
Ie. I just needed a blog to record my thoughts and my progress and also ask some questions and get some feedback. ET is not bad for this, IMO :-)
But, yes, now I'm sure and I'll see further...
 
You must log in or register to reply here.
Back
Top