An Analysis of Option Pricing Models Charles Vu 2002-2003
Project Description
Title: An Analysis of Option Pricing Models

Background: The premise of a stock option is that someone sells the right to buy their shares of a particular stock at a certain price by a certain date. For example, if Microsoft (MSFT) is at $50 on October 1st, the price of the option to purchase a share of MSFT for $50 at anytime before October 15th might cost me $2. If MSFT is still at $50 on October 15, I will lose my $2. However, if MSFT is at $60 on October 15th, I can still purchase the shares at $50, and therefore make a 10-2 = $8 profit, a good profit since I only put $2 at risk. Further, if MSFT goes down to $40, or lower, I still only lose the $2 I spent for the option. If I had simply bought shares of MSFT, I would have been down $10. But the question remains, is the option I bought worth $2, or is it worth more than $2, or less? Many models have been proposed to answer this question.

Project Description: Currently, many models exist which attempt to price stock options. This project will examine the most popular option pricing models used by professionals today. By analyzing past stock and option data and comparing it against historical stock market returns, the project will identify the best option pricing model, if such a model exists.

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