The Monte Carlo Option Model was developed to compute the exact value of a particular option using Monte Carlo Methods, as termed by Stanislaw Ulam. Designed by Phelim Boyle, this model was implemented for the first time in the year 1977 for the purpose of option pricing, which was applied for calculating the value of European options. A few years after, the model was also … [Read more...]
Binomial Options Pricing Model [Explained]
This model is an options valuation method developed by Cox, et al, in 1979. The binomial option pricing model uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the option's expiration date. The model reduces possibilities of price changes, removes the possibility for arbitrage, … [Read more...]
Black-Scholes Model Explained
The Black Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes and is still widely used today, and regarded as one of the best ways of determining fair prices of options. The Black Scholes Model can be described as a model of price variation over time of financial instruments … [Read more...]
Net volatility
Net volatility is the volatility implied by the price of an option spread trade involving two or more options. In other words, it is the volatility at which the theoretical value of the spread trade matches the price quoted in the market, or, in other words, the implied volatility of the spread. Formula The net volatility for a two-legged spread (with one long leg, and … [Read more...]
Box Spread
A Box Spread is a dual option position involving a bull and bear spread with identical expiry dates. This investment strategy provides for minimal risk. Additionally, it can lead to an arbitrage position as an investor attempts to lock in a small return at expiry. A box spread is a complicated strategy for the more advanced options trader. The purpose of this investment is to … [Read more...]