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Total Posts: 1
Joined: May 2017
Posted: 2017-05-31 05:16
Hi Everyone,

I have a developed a more accurate model for pricing American options - at the frequency of the 150 node tree and precision of the 10,000 nodes. Building upon this discovery, I have developed a method of pricing American style options contracts paying dividends 100% accurately from extracting the implications from the term structure also in real-time.

I have ran a hypothetical scenario on a call option which produced a 2% error when computed with the 150 node tree compared to my pricing model. I know that my model represents the true options price because as I add nodes (up to 40k) to the tree, the price converges towards mine.

How can I use this 2% error to build profitable arbitrage trading strategies for options markets. Furthermore, I would love to speak with and possibly work with anyone who has options arbitrage trading experience.

Thank you


Total Posts: 1765
Joined: Jul 2004
Posted: 2017-05-31 09:30
So your model and my model price an american call differently.
Since we both calibrate to the same market data we will end up with slightly different implied vols for this call.

In order to profit of this arbitrage you will need to trade an option combinaison that would eliminate all risk and leave a profit. That's unlikely I am afraid

Qui fait le malin tombe dans le ravin


Total Posts: 96
Joined: Apr 2010
Posted: 2017-05-31 11:21
I think convergence is not necessarily a proof of precision.

There is confusion about models in this context. I see 3 different models:
- numerical model (binomial, finite difference, Monte Carlo, ...)
- diffusion process (usually B&S framework)
- dividend model (plain discrete dividend, discounted discrete dividend, discrete dividend transformed into continuous dividend yield,...)

The dividend model influences the diffusion process hence modifies the implied volatility even for European options.

Options pricing means first calibrating the forward, then the volatility.

There exists this classical American options arbitrage (forbidden on certain exchanges) which consists of selling huge (as the other guy says) amount of delta-hedged In-The-Money calls right before the ex-dividend date. If some people forget to exercise these calls, one can earn the dividend. No need to have a pricer for this one.


Total Posts: 33
Joined: Jul 2007
Posted: 2017-06-01 21:55
usually, when people talk about a model they mean an SDE which describes the dynamics of the asset prices and the cashflows. separate from it, there is a numerical method used to calculate e.g. expectations in the specified probability space. it looks like you are talking about the numerical methods. it's not clear what problem is solved by your numerical method, what is the model and what are the assumptions?
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