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@mick001
Last active February 20, 2020 19:44
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Call option pricing in Python assuming normally distributed returns
"""
MONTE CARLO PLAIN VANILLA OPTION PRICING
This script is used to estimate the price of a plain vanilla
option using the Monte Carlo method and assuming normally
distributed returns using a parametric normal distribution
approach.
Call option quotations are available at:
http://www.google.com/finance/option_chain?q=NASDAQ%3AAAPL&ei=fNHBVaicDsbtsAHa7K-QDQ
In this script the following assumptions are made:
- Returns are normally distributed and can be modeled using
a normal distribution. The price of the stock at time t+1
can be assumed to be:
s1 = s0*drift + s0*stdv*Z
where: t=1 and Z is a normally distributed random variable (0,1)
The drift term is estimated by averaging historical returns.
The stdv term is estimated by calculating the standard deviation
of historical returns.
"""
import numpy as np
# Optional seed
np.random.seed(12345678)
# Stocastic walk
# This function calculates the stochastic integral after periods
# and returns the final price.
def stoc_walk(p,dr,vol,periods):
w = np.random.normal(0,1,size=periods)
for i in range(periods):
p += dr*p + w[i]*vol*p
return p
# Parameters
s0 = 114.64 # Actual price
drift = 0.0016273 # Drift term (daily)
volatility = 0.088864 # Volatility (daily)
t_ = 365 # Total periods in a year
r = 0.033 # Risk free rate (yearly)
days = 2 # Days until option expiration
N = 100000 # Number of Monte Carlo trials
zero_trials = 0 # Number of trials where the option payoff = 0
k = 100 # Strike price
avg = 0 # Temporary variable to be assigned to the sum
# of the simulated payoffs
# Simulation loop
for i in range(N):
temp = stoc_walk(s0,drift,volatility,days)
if temp > k:
payoff = temp-k
payoff = payoff*np.exp(-r/t_*days)
avg += payoff
else:
zero_trials += 1
# Averaging the payoffs
price = avg/float(N)
# Priting the results
print("MONTE CARLO PLAIN VANILLA CALL OPTION PRICING")
print("Option price: ",price)
print("Initial price: ",s0)
print("Strike price: ",k)
print("Daily expected drift: ",drift*100,"%")
print("Daily expected volatility: ",volatility*100,"%")
print("Total trials: ",N)
print("Zero trials: ",zero_trials)
print("Percentage of total trials: ",zero_trials/N*100,"%")
# Output
# MONTE CARLO PLAIN VANILLA CALL OPTION PRICING
# Option price: 16.1412296587
# Initial price: 114.64
# Strike price: 100
# Daily expected drift: 0.16272999999999999 %
# Daily expected volatility: 8.8864 %
# Total trials: 100000
# Zero trials: 14664
# Percentage of total trials: 14.664 %
# >>>
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