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The traders' rule and long‐term options
Author(s) -
Kim Sol,
Song In Jung
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22170
Subject(s) - term (time) , market liquidity , economics , black–scholes model , index (typography) , valuation of options , financial economics , computer science , econometrics , finance , volatility (finance) , physics , quantum mechanics , world wide web
Studies show that option traders prefer using the traders' rule to price short‐term options over more mathematically sophisticated models. This study uses Standard & Poor's 500 index option data to determine whether the traders' rule also outperforms mathematically more sophisticated models in pricing long‐term options. The results show that, while the traders' rule still enjoys smaller pricing errors for short‐term options, more mathematically sophisticated models perform better for long‐term options. This result may reflect the greater liquidity of short‐term options, which are far more actively traded than longer‐term options.