option pricing junya namai. agenda current option price for netflix binomial model for stock ...
TRANSCRIPT
Option Pricing
Junya Namai
Agenda Current Option Price for Netflix Binomial Model for Stock Binomial Options Pricing for Call Option Binomial Options Pricing for Put Option Binomial Options Pricing for Call Option – Multi
period Black-Scholes Model Quiz Questions
Current Option Price for Netflix http://
finance.yahoo.com/q/op?s=NFLX&m=2013-05
Binomial Model for Stock
t0 t1
up
down
$80
$55
P(u) = 0.6
P(d) = 0.4
= = $64.81
r = 0.08
Binomial options pricing for Call Option
t0 t1
up
down
$80
$55
P(u) = 0.6P(d) = 0.4
= = $5.556
K = $70$10
$0
r = 0.08
Max(0, Price - K)
Binomial options pricing for Put Option
t0 t1
up
down
$80
$55
P(u) = 0.6P(d) = 0.4
= = $5.556
K = $70$0
$15
r = 0.08
Max(0, K-Price)
Call Option - Multi Period t0 t1 t2 t3 t4
$90
$80
$70
$60
$50
P(u) = 0.6P(d) = 0.4
K = $70
r = 0.08
0.6
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
$20
$10
$0
$0
$0
Max(0, Price-K)
Call Option - Multi Period t4
$90
$80
$70
$60
$50
Path
1
4
6
4
1
call
$20
$10
$0
$0
$0
4ups
3ups + 1down
2ups + 2downs
3downs + 1up
4downs
Call Option - Multi Period
Binomial Distribution (Pascal's triangle)
Black-Scholes Formula (5 parameters) Stock Price Exercise (Strike) Price Time to Expiration Volatility of Stock Risk-Free Rate
Black-Scholes Formula Value of call option =
cumulative normal probability density function = exercise price of option; PV(EX) is calculated by
discounting at the risk-free interest rate rf t = number of periods to exercise date P = price of stock now = standard deviation per period of (continuously
compounded) rate of return on stock
Black-Scholes Formula P=430, EX=430, =0.4068, t=0.5(6 months),
rf=.05 = = 0.1956 = 0.195 – 0.4068 = -0.0921
= N(-0.0921) = 1-N(0.0921) = 0.4633 Use Normsdist function in Excel
= 0.5775430 – (0.4633430/1.015) = 52.04 $52.04
Binomial vs Black-Scholes Binomial
Flexible Finite steps Discrete Values American Values complexities
Black-Scholes Limited Infinite Continuous
Quick Quiz 1 If volatility of stock price becomes higher,
does the option price go up or down?
Black-Scholes Calculator
Lognormal Distribution
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Percent price changes
Pro
babilit
y
Quick Quiz 2 If interest rates becomes higher, does the
option price go up or down?
Question
Reference http://stattrek.com/probability-distributions/binomial.aspx http://en.wikipedia.org/wiki/Binomial_distribution http://
www.tradingtoday.com/black-scholes?callorput=c&strike=70&stock=70&time=180&volatility=48&interest=8
http://en.wikipedia.org/wiki/Binomial_options_pricing_model
http://www.optiontradingpedia.com/free_black_scholes_model.htm
http://www.optiontradingpedia.com/free_black_scholes_model.htm
http://easycalculation.com/statistics/binomial-distribution.php
http://www.hoadley.net/options/bs.htm
Risk-Neutral Valuation (Backup)
Expected return
rf = 1.5%Expected return 1.5 = 33p - 25(1-p)1.5 = 33p + 25p -25 p = 45.6%
Risk-Neutral Valuation (Backup)
Risk-Neutral Valuation (Backup)
Up and Down Changes to STD 1+upside change = u = 1+downside change = d = 1/u
e = 2.718 = standard deviation of stock returns h = interval as fraction of a year
To find the standard deviation given u, we turn the formula around