Is Black-Scholes the Right Option for Options?
- Thread starter McCloud
- Start date
nitro,
I have been looking for a software to be able to calculate values using stochastics volatility (you can download the BS calculator from the net for free) .. The following is a link to a paper someone wrote that I think is interesting. There are also some graphics showing the impact of different parameters on the smile and brief explanation of the models that may help understand it. At the end there is also a section about developing a software using SABR to calculate the values in real time. You may want to take a look at it fwiw..
Also I am by no means an expert at this and TaoTrader and sle seem to be more knowledgeable.
http://www.imprimerie.polytechnique.fr/Rapports/Files/rapport080702.pdf
I have been looking for a software to be able to calculate values using stochastics volatility (you can download the BS calculator from the net for free) .. The following is a link to a paper someone wrote that I think is interesting. There are also some graphics showing the impact of different parameters on the smile and brief explanation of the models that may help understand it. At the end there is also a section about developing a software using SABR to calculate the values in real time. You may want to take a look at it fwiw..
Also I am by no means an expert at this and TaoTrader and sle seem to be more knowledgeable.
http://www.imprimerie.polytechnique.fr/Rapports/Files/rapport080702.pdf
McCloud,
Thanks so much for the link. It is funny, while digging for stuff on it last night, I too ran into many papers on SABR. This is the only one I read because of the level of honesty displayed is refreshing for a paper of this kind.
I am going to go and get a color printer just so that I can take this paper on vacation with me.
Thanks again.
nitro
Thanks so much for the link. It is funny, while digging for stuff on it last night, I too ran into many papers on SABR. This is the only one I read because of the level of honesty displayed is refreshing for a paper of this kind.
I am going to go and get a color printer just so that I can take this paper on vacation with me.
Thanks again.
nitro
Quote from McCloud:
nitro,
I have been looking for a software to be able to calculate values using stochastics volatility (you can download the BS calculator from the net for free) .. The following is a link to a paper someone wrote that I think is interesting. There are also some graphics showing the impact of different parameters on the smile and brief explanation of the models that may help understand it. At the end there is also a section about developing a software using SABR to calculate the values in real time. You may want to take a look at it fwiw..
Also I am by no means an expert at this and TaoTrader and sle seem to be more knowledgeable.
http://www.imprimerie.polytechnique.fr/Rapports/Files/rapport080702.pdf
OK,
Here is a question for options experts:
Take a look at the implied volatilites for ABS, especially for the Sep 20 call at .50. It seems WAY underpriced to me from just watching this stock trade on a daily basis.
For crying out loud, anytime the spoos move, this thing goes with it. IMHO, they are calculating the beta of it too low [my guess is the beta is close to 1 in the past month or so. Perhaps the model is assuming mean reversion in IV?]
The CBOE gives the historical volatility of ABS at 40.651. The option strategist gives:
Symbol (option symbols) hv20-hv50-hv100---DATE---curiv--Days/Percentile
ABS,KLX,XQC-------------21--38-----36---030725--27.20--600/ 27%ile
What is interesting is that ABS is the only one of the big food (KR, SWY) retail group that pays a dividend (.19.) I know that the call has to value this in, as the call buyer does not have the right to the div, so the "real" value of the call is ~ .69??!!
I would love for someone to post a picture of their calculation of the greeks, implied volatility, skew/smile of ABS.
What do yoy guys think? Is ABS mispriced? What value does your model give for the Sep ABS 20 call?
nitro
Here is a question for options experts:
Take a look at the implied volatilites for ABS, especially for the Sep 20 call at .50. It seems WAY underpriced to me from just watching this stock trade on a daily basis.
For crying out loud, anytime the spoos move, this thing goes with it. IMHO, they are calculating the beta of it too low [my guess is the beta is close to 1 in the past month or so. Perhaps the model is assuming mean reversion in IV?]
The CBOE gives the historical volatility of ABS at 40.651. The option strategist gives:
Symbol (option symbols) hv20-hv50-hv100---DATE---curiv--Days/Percentile
ABS,KLX,XQC-------------21--38-----36---030725--27.20--600/ 27%ile
What is interesting is that ABS is the only one of the big food (KR, SWY) retail group that pays a dividend (.19.) I know that the call has to value this in, as the call buyer does not have the right to the div, so the "real" value of the call is ~ .69??!!
I would love for someone to post a picture of their calculation of the greeks, implied volatility, skew/smile of ABS.
What do yoy guys think? Is ABS mispriced? What value does your model give for the Sep ABS 20 call?
nitro
Using Binomial tree 40.651% volatility would gives us a Sep 20 call at price of 0.7. But the VIX is only around 20 these days, compare 40 during the first quarter. Volatility and therefore Options' values are relatively low right now. The Sep 20 call at .50 has a 32.9% IV, seems to be consistent with the overall market condition.
a $0.19 dividend before expiration would lower the call value by a few pennies but the next div. is expected around Oct. 11, it will only affect Oct calls, not Sep calls.
I expect volatility will pick up in a few months. By then I will start to sell some puts and calls again. I just don't feel good buy options, even if they are relatively cheap.
TheTao,
Still, this begs the question - how are the MARKET MAKERS deriving where to price these options? We are "off" [overestimating] by almost 50% on the value of the calls, and about 25% on the value of the puts!!
BTW, what risk free interest rate did you use, and how did you get it? On the Wilmott website, there is some discussion of this. I always thought it was unclear. They claim that the correct risk free interest rate to use is the one stripped of all other obligations. For example:
"...If accuracy is not crucial, I suggest using a swap rate or LIBOR quote for the expiry of the option. You can get something close to this by stripping a treasury curve. The exact choice of instrument is less important than making sure you've understood the market conventions so you can convert to the log interest rate demanded by BS. "
or
"You can back out what rates the market is using by implying the rate from the settlement prices. Then compare that with your rate. Market makers will typically use standard forward or spot rates based on the swap curve."
I got the same number as you - See the attachment at the end of this post.
I just found this website that gives LIBOR Rates:
http://www.fanniemae.com/tools/libo...XBA121J2FQSISFGFHQWCI4IV5?p=Tools+&+Resources
nitro
Still, this begs the question - how are the MARKET MAKERS deriving where to price these options? We are "off" [overestimating] by almost 50% on the value of the calls, and about 25% on the value of the puts!!
BTW, what risk free interest rate did you use, and how did you get it? On the Wilmott website, there is some discussion of this. I always thought it was unclear. They claim that the correct risk free interest rate to use is the one stripped of all other obligations. For example:
"...If accuracy is not crucial, I suggest using a swap rate or LIBOR quote for the expiry of the option. You can get something close to this by stripping a treasury curve. The exact choice of instrument is less important than making sure you've understood the market conventions so you can convert to the log interest rate demanded by BS. "
or
"You can back out what rates the market is using by implying the rate from the settlement prices. Then compare that with your rate. Market makers will typically use standard forward or spot rates based on the swap curve."
I got the same number as you - See the attachment at the end of this post.
I just found this website that gives LIBOR Rates:
http://www.fanniemae.com/tools/libo...XBA121J2FQSISFGFHQWCI4IV5?p=Tools+&+Resources
nitro