Publication Date

Summer 7-29-2019

Abstract

Many discussions on how best to model the standard American Option derivative focus solely upon the volatility smile modelling itself from a mathematical perspective. This thesis instead closely examines both the practical and mathematical implications of processing market data, modelling the volatility smile, and making real-world trading decisions from the results. In particular, it contains an analysis of market data processing algorithms, new volatility smile models, multiple empirically-driven weighting schemes, Gauss-Newton and Levenberg-Marquardt optimization algorithms, and various trading strategies. The top performing combinations found were those that involved the Smile and Twist volatility smile models, Volatility Width Vega Multiplier weighting scheme, the Gauss-Newton algorithm, and a percent-edge based trading strategy. This work provides a complete start-to-finish approach to modelling and deriving value from the standard American Option contract for intra-expiration options.

Degree Name

Mathematics

Level of Degree

Masters

Department Name

Mathematics & Statistics

First Committee Member (Chair)

Jens Lorenz

Second Committee Member

Deborah Sulsky

Third Committee Member

Yan Lu

Language

English

Keywords

American Option, Volatility, Smile, Modelling, Trading, Optimization

Document Type

Thesis

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