Ockham's Razor has often been interpreted as "

1) Ockham's is much simpler to apply and offers very similar accuracy as BS for ATM (At The Money) options.

2) Ockham's gives answers where BS fails for options near expiration.

ATMO = S * 0.5 * MAD * SD

= S * 0.5 * sqrt(2/pi) * SD

= S * 0.4 * SD

= S * 0.4 * V * sqrt(T/254)

= S * V / 40

ATMO = ATM fair value option price

S = Underlying product value

V = Realized volatility

T = days until option expiration

It is similar to theta, except this is much more accurate near expiration.

D(t, T) = 100 * [1 - sqrt(t/T)]

D(t, T) = Decay as a % of option price up to time t

T = days until option expiration

t = days from expiration

For example, between the 4th and 5th trading days until expiration, an option is expected to lose

100 * [1 - sqrt(4/5)] = 10.5573%

**when you have two competing theories that make exactly the same predictions, the simpler one is the better**." In the case of option valuations, I have found Ockham's Formula (Gallacher) significantly more practical than Black Scholes for a couple of reasons:1) Ockham's is much simpler to apply and offers very similar accuracy as BS for ATM (At The Money) options.

** While Ockham's is not explicitly able to estimate fair value of OTM (Out of The Money) options, BS estimates are wildly inaccurate.*2) Ockham's gives answers where BS fails for options near expiration.

**Ockham's ATM Option valuation**ATMO = S * 0.5 * MAD * SD

= S * 0.5 * sqrt(2/pi) * SD

= S * 0.4 * SD

= S * 0.4 * V * sqrt(T/254)

= S * V / 40

*where*ATMO = ATM fair value option price

S = Underlying product value

V = Realized volatility

T = days until option expiration

**Ockham's Option decay estimate**It is similar to theta, except this is much more accurate near expiration.

D(t, T) = 100 * [1 - sqrt(t/T)]

*where*D(t, T) = Decay as a % of option price up to time t

T = days until option expiration

t = days from expiration

For example, between the 4th and 5th trading days until expiration, an option is expected to lose

100 * [1 - sqrt(4/5)] = 10.5573%

## 0 Reflections:

Post a Comment