
Show HN: First Ever Analytical Solution for Options Pricing (Breakthrough) - mkhan
http://demo.oquant.com/
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samfisher83
If I remember my finance right you never want to use your option until the
very end since baked into the price of an option there is a premium for time
which decreases the closer it is to expiration. That is why black sholes works
pretty well.

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mkhan
By using your option you probably meant buying and later exercising it. Here
is a non-speculative, non-hedging buyer's statement. At an ITM strike
profitable for exercising but still listed, it's better to re-sell rather than
exercise because the option price is always higher that the instant payoff.
This is why implied volatilities at listed ITM strikes are pumped up, causing
the smile and skew. It's better to exercise sooner because with time you lose
in the option premium you could reclaim. If the strike is no longer listed
(this may happen if the underlying moves ITM too far from the strike and the
option becomes too expensive and, as a result, even more beneficial to
exercise), exercising it sooner or later is your choice. However, again, it
makes a better sence to exercise it immediately and lock your profit from a
risk of potential underlying moves due to the drift (alpha). Holding the
option to the very end in a European way in general is not good because, as
you correctly mentioned, the premium for time decreases with getting closer to
the expiration and you just lose the money you initially paid for the option.
An early exercise also gives you more of instant flexibility in your further
trading decisions.

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pizza
Is there any explanation for what this is and why it's useful?

~~~
spearmunkie
To explain that, you first need to understand what options are.

Options are a financial instrument where you can make bets on the market. To
give you a simple example of an option, suppose you have a house worth 250k
that you want to sell. You want to sell it within a year, but you are afraid
that your house might lose value within that year (this is called the
maturity). You might decide to instead sell an option contract for $5k,
pricing the house at $250k which can be exercised within a year. What does
this mean? This means that as a buyer, I pay $5k for this contract for the
right to buy the underlying asset at $250k at any point within that year. The
buyer is betting that the house value might appreciate beyond $250k, and the
seller wants to protect themselves from the scenario that their house value
depreciates. In general. options are all about betting what will happen in the
future.

The problem now is in pricing your option contract. The earliest and most
famous model of pricing comes from the Black Scholes model for pricing
European options. With European options, you only exercise your option at the
end of the maturity of the contract. However, with American options, things
are a lot more complex, since the buy may decide to exercise their option at
anytime within the maturity period. Moreover 99% of the industry trades with
American options. For pricing American Options, the best method is to use a
binomial or trinomial tree with many nodes (I will let you look up what those
are).

The problem with the binomial and trinomial tree is that, it's very slow. You
could lower the number of nodes in your tree, but then you lose accuracy.
There are analytical solutions like Ju-Zhong which are very fast.
Unfortunately such approximations tend to lose accuracy, and their error blows
up. Finding an accurate approximation for pricing American options is a
significant breakthrough for the industry. This problem has been eluding the
best researchers in the field for decades. What we have is an analytical
solution to option pricing that is very fast, and highly accurate.

Why are we interested in option pricing? For one thing, it is a $500+ trillion
dollar industry, and a lot of money is being lost in pricing errors. More
importantly, if you are given an option contract, you can infer the implied
volatility of the underlying asset (volatility is the degree of variation of
the price of the underlying asset; could be stocks, real-estate etc.) . Since
our solution is highly accurate and fast, we can extract the implied
volatility in real time, along with the associated partial derivatives and
make real time decision and assessments on the market.

You can checkout our white papers, we have a series of papers coming out to
explain all of the use cases:
[http://oquant.com/OquantRealTimeOptions.pdf](http://oquant.com/OquantRealTimeOptions.pdf)
[http://oquant.com/OquantWhitepaper.pdf](http://oquant.com/OquantWhitepaper.pdf)

~~~
PhantomGremlin
_it is a $500+ trillion dollar industry, and a lot of money is being lost in
pricing errors_

If I had a magical algorithm that was so much better than what was out there,
I'd keep it to myself for about a year or two. If I could capture about 0.2%
of the value of that industry, I'd increase my net worth to about 1 trillion
dollars. Surely it couldn't be _that_ hard to squeeze 0.2% of inefficiency out
of options?

IOW, "if you're so smart, why aren't you rich?"

I never could understand why people want to share these sorts of breakthroughs
with the world, rather than use them to become wealthy beyond anyone's wildest
dreams.

~~~
zzleeper
They are not sharing it: "Oquant approximation (prop mathematical algorithm)"

They just derive more value from selling this to _everyone_ than from
investing in-house. Partly because if you want to get some alpha in hft or
whatnot you probably need a lot of other things (networks, lots of capital,
etc.)

