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Option Price Estimations and Speculative Trading In Knowledge Society

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  • Ovidiu TURCOANE

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    Derivatives market has known an enormous and continuous development from the late 1970s, thanks to the most celebrated Black-Scholes-Merton formula. The impact on global economy is also tremendous, but due to the high leverage of speculative option trading there is a perpetual danger of economic collapse. This paper gives a short description of knowledge society and proposes methods for option price estimation based on implied volatility, skewness and kurtosis. ‘Free-lunch’ is hardly achievable if one predicts the option price using the knowledgeable information from the market and there is almost impossible to speculate, rather than to hedge, when trading option.

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    File URL: http://www.revistaie.ase.ro/content/64/15%20-%20Turcoane.pdf
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    Article provided by Academy of Economic Studies - Bucharest, Romania in its journal Informatica Economica.

    Volume (Year): 16 (2012)
    Issue (Month): 4 ()
    Pages: 131-141

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    Handle: RePEc:aes:infoec:v:16:y:2012:i:4:p:131-141
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    1. Emmanuel Jurczenko & Bertrand Maillet & Bogdan Negrea, 2002. "Skewness and kurtosis implied by option prices: a second comment," LSE Research Online Documents on Economics 24938, London School of Economics and Political Science, LSE Library.
    2. Charles J. Corrado & Tie Su, 1996. "S&P 500 index option tests of Jarrow and Rudd's approximate option valuation formula," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(6), pages 611-629, 09.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    4. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
    5. Hayunga, Darren K. & Holowczak, Richard D. & Lung, Peter P. & Nishikawa, Takeshi, 2012. "Derivatives traders’ reaction to mispricing in the underlying equity," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2438-2454.
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