Innovative modeling techniques that overcome fundamental flaws in Black-Scholes and
other option pricing models
"An intriguing, in-depth look at what really constitutes option pricing theory.
Plus, some interesting thoughts on projecting and assessing volatility. A must read for
those who are looking for more advanced option modeling techniques."
Lawrence G. McMillan, author of Options as a Strategic Investment and McMillan on
Options
"Refreshingly grounded in empirical data and a spirit of numerical
experimentation, this book also succeeds at explaining the arcane mathematical concepts of
options pricing in straightforward, clear language. The reader will come away not just
with the accepted wisdom of the field, but also with a good sense of how to test that
wisdom against real data."
William H. Press, senior author of the Numerical Recipes book and software series
"Katz and McCormick's rigorous data studies and their experiences as traders lead
to useful solutions for option modeling. In addition, their ability to write in
clear English should be studied by all financial authors."
Howard L. Simons, president, Rosewood Trading, Inc., and contributing editor, Futures
magazine
Popular option pricing models, from Black-Scholes to Cox-Ross-Rubinstein, have been
shown to consistently break down under certain market conditions. Advanced Option Pricing
Models outlines well-researched and tested alternatives to these models. It also shows
traders how to design and implement models that are consistent with the distributional
quirks of the underlying markets, while providing more accurate pricing estimates under a
wider range of market conditions.
"In this book, we have analyzed standard option pricing models, discovered
their flaws, and investigated better estimators of volatility and other model inputs. We
have also explored nonstandard, rather innovative ways to achieve more accurate appraisals
of option value. It is our sincere hope that this will give you the edge you need in the
tough options game."
From the Introduction
Option trading is a fiercely competitive pursuit in which pricing models are essential
for evaluating various strategies and estimating the payoff of each under different market
scenarios. Unfortunately, standard option pricing models from Black-Scholes to
Cox-Ross-Rubinstein can provide inaccurate conclusions under numerous market conditions,
leading traders to arrive at erroneous pricing estimates and initiate unprofitable trades.
Advanced Option Pricing Models takes an objective, scientific look at this problem,
detailing specific conditions under which standard option pricing models fail to provide
accurate price estimates. The book then shows how to construct nonstandard models that
effectively compensate for those flaws and provide a profitable competitive edge over
traders still using older models.
This solidly researched book explores:
- Factors that influence fair value, along with mathematical concepts required when
developing pricing models
- Moments of returns, and how differences in their levels under a variety of conditions
affect both the fair value and real-market price of options
- Models that combine two or more variables to provide distinctly better estimations of
future volatility
- How nonlinear models such as neural networks and polynomial regressions can be fit to
data derived from actual stock and option prices, and outperform Black-Scholes on such
data
- How to build models designed to identify and exploit gross option mispricings that can
quickly appear - and, just as instantaneously, disappear
A thorough understanding of the factors that influence option prices is essential for
the development of an effective pricing model. Advanced Option Pricing Models analyzes
standard pricing models, revealing their strengths as well as their fundamental flaws,
then introduces nonstandard approaches that option analysts and traders can use to reach
more consistently accurate, and profitable, appraisals of option value.
Hardcover, 437 pages