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A Simple Option‐Pricing Formula
Author(s) -
Savickas Robert
Publication year - 2002
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/1540-6288.00012
Subject(s) - weibull distribution , simplicity , black–scholes model , simple (philosophy) , algebraic number , mathematics , distribution (mathematics) , valuation of options , term (time) , mathematical economics , econometrics , economics , statistics , physics , mathematical analysis , volatility (finance) , philosophy , epistemology , quantum mechanics
A simple option‐pricing formula based on the Weibull distribution is introduced. The simplicity of the algebraic form and ease of implementation are comparable to those of Black‐Scholes. Application to S&P 500 options shows that the pricing biases present in the Black‐Scholes model are eliminated. Prices produced by the presented model generally lie within or close to the bid‐ask spread. For long‐term options (over one year), the Weibull formula exhibits significantly higher precision than the Black‐Scholes formula does. While a rigorous comparison of all available models is necessary, the simplicity and precision of the proposed model are its main advantages over the existing models.