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optstockbybaw

Calculate American options prices using Barone-Adesi and Whaley option pricing model

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Syntax

Price = optstockbybaw(RateSpec,StockSpec,Settle,Maturity,OptSpec,Strike)

Description

Price = optstockbybaw(RateSpec,StockSpec,Settle,Maturity,OptSpec,Strike) calculates American options prices using the Barone-Adesi and Whaley option pricing model.

example

Examples

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Open Live Script

Consider an American call option with an exercise price of $120. The option expires on Jan 1, 2018. The stock has a volatility of 14% per annum, and the annualized continuously compounded risk-free rate is 4% per annum as of Jan 1, 2016. Using this data, calculate the price of the American call, assuming the price of the stock is $125 and pays a dividend of 2%. 

StartDate  = datetime(2016,1,1);
EndDate = datetime(2018,1,1);
Basis = 1;
Compounding = -1;
Rates = 0.04;

Define the RateSpec. 

RateSpec = intenvset('ValuationDate',StartDate,'StartDate',StartDate,'EndDate',EndDate, ...
'Rates',Rates,'Basis',Basis,'Compounding',Compounding)
RateSpec = struct with fields:
           FinObj: 'RateSpec'
      Compounding: -1
             Disc: 0.9231
            Rates: 0.0400
         EndTimes: 2
       StartTimes: 0
         EndDates: 737061
       StartDates: 736330
    ValuationDate: 736330
            Basis: 1
     EndMonthRule: 1

Define the StockSpec. 

Dividend = 0.02;
AssetPrice = 125;
Volatility = 0.14;

StockSpec = stockspec(Volatility,AssetPrice,'Continuous',Dividend)
StockSpec = struct with fields:
             FinObj: 'StockSpec'
              Sigma: 0.1400
         AssetPrice: 125
       DividendType: {'continuous'}
    DividendAmounts: 0.0200
    ExDividendDates: []

Define the American option. 

OptSpec = 'call';
Strike = 120;
Settle = datetime(2016,1,1);
Maturity = datetime(2018,1,1);

Compute the price for the American option. 

Price = optstockbybaw(RateSpec,StockSpec,Settle,Maturity,OptSpec,Strike)
Price = 
14.5180

Input Arguments

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Interest-rate term structure (annualized and continuously compounded), specified by the RateSpec obtained from intenvset. For information on the interest-rate specification, see intenvset.

Data Types: struct

Stock specification for the underlying asset. For information on the stock specification, see stockspec.

stockspec handles several types of underlying assets. For example, for physical commodities the price is StockSpec.Asset, the volatility is StockSpec.Sigma, and the convenience yield is StockSpec.DividendAmounts.

Data Types: struct

Settlement date for the American option, specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optstockbybaw also accepts serial date numbers as inputs, but they are not recommended.

Maturity date for the American option, specified as a NINST-by-1 vector using a datetime array, string array, or date character vectors.

To support existing code, optstockbybaw also accepts serial date numbers as inputs, but they are not recommended.

Definition of the option as 'call' or 'put', specified as a NINST-by-1 cell array of character vectors or string arrays with values 'call' or 'put'.

Data Types: char | cell | string

American Option strike price value, specified as a nonnegative scalar or NINST-by-1 matrix of strike price values. Each row is the schedule for one option.

Data Types: single | double

Output Arguments

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Expected prices for American options, returned as a NINST-by-1 vector.

More About

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Vanilla Option

A vanilla option is a category of options that includes only the most standard components.

A vanilla option has an expiration date and straightforward strike price. American-style options and European-style options are both categorized as vanilla options.

The payoff for a vanilla option is as follows:

  • For a call: max(St−K,0)

  • For a put: max(K−St,0)

where:

St is the price of the underlying asset at time t.

K is the strike price.

For more information, see Vanilla Option.

References

[1] Barone-Aclesi, G. and Robert E. Whaley. “Efficient Analytic Approximation of American Option Values.” The Journal of Finance. Volume 42, Issue 2 (June 1987), 301–320.

[2] Haug, E. The Complete Guide to Option Pricing Formulas. Second Edition. McGraw-Hill Education, January 2007.

Version History

Introduced in R2017a

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