Advanced Option Pricing Models - download pdf or read online

By Jeffrey Owen Katz

ISBN-10: 0071626441

ISBN-13: 9780071626446

Complex choice Pricing types information particular stipulations below which present choice pricing types fail to supply actual fee estimates after which indicates choice investors the way to build more suitable types for higher pricing in a much broader variety of marketplace stipulations. Model-building steps conceal concepts pricing below conditional or marginal distributions, utilizing polynomial approximations and “curve fitting,” and compensating for suggest reversion. The authors additionally advance powerful prototype versions that may be placed to fast use, with real-time examples of the versions in motion.

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C H A P T E R 1 A Review of Options Basics This chapter provides some background by defining options and many of the terms used when discussing them. It looks at where options are traded, examines a few of their salient characteristics, and discusses some of the factors that influence their value. The reader is introduced to option price charts, which are used to illustrate the option terminology and influential factors under discussion. The fundamentals of pricing models, the Greeks, put-call parity, synthetics, and equivalent positions are also covered.

The curves describing the effect seem to be well-approximated by straight lines. This is in stark contrast to time, volatility, and stock price, all of which have more complex, curvilinear effects on option prices. Graphic representations of option behavior, such as those illustrated in the figures, can help the options trader visualize the characteristics not only of single options, but also of complex strategies involving multiple options and, perhaps, the underlying stock as well. As an example, consider the next chart, which is for a straddle.

Numerous Web sites offer Black-Scholes calculators. Needless to say, the Black-Scholes model is used by almost every serious trader of options, even those having access to newer and more complex pricing models. The reason is that, although not perfect by any means, Black-Scholes is familiar, easily understood, and does provide reasonable estimates of an option’s worth under normal conditions. In addition, it is very easy to calculate implied volatility and the Greeks using the Black-Scholes formula.

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Advanced Option Pricing Models by Jeffrey Owen Katz

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