I am currently in a finance-science master program. My field is nearly the same.
I did price the option using a floating variance calculation. This lead to a price of 0.03 ~. Don't have the calculations here though.
You can also check the implied volatility of a given price, you will see that the IV for a far out of the money option, with a short runtime, will be EXTREMELY high, like 200-400% a year. Total crazy.
One thing to note is, that bitcoin is not normally distributed at this moment in time. It is a fattail distribution paradise.
That's why I chose to add a 100% premium on the calculated fair price.
Good to know about your program. I am a graduate of a FE program.
When you say floating var, I believe you mean using a stochastic vol? Did you use any of the pre built modeling techniques?
The IVs should come around those numbers. That's how volatile bitcoin has been. This also means that the options will technically be pretty expensive.
That in
red is the real challenge in pricing a btc option fairly. So your fair price was from your own calculation or using some online calculator? If you used an online one, would you mind sharing the link of what you used?
Yeah stochastic. Im no native english speaker
I was using a own approach that is working quite well for stocks too. Very similar to the event study approach though.
Options don't need to be expensive, there is a fair price, the problem is, that the best guesses will have a very high error term. That's the reason. Wall street has 30 year+ of data they can ovserve. We got about 2-3 years of good data (good is a faaaaar stretch)
Fattails can be priced, but it is very complicated to do it by hand, I should write a script for that....
I was doing it by hand and by a calculator I found online (It looks quick and dirty tbh)
http://www.option-price.com/ . The calculator was pricing the options way too low in my eyes (even below the 0.035). So I don't know, there is no explanation on how it works exactely.
