Statistical Optimization of Option Pricing Factors

Abstract

Options are a highly versatile trading tool renowned for mitigating downside risk while offering unlimited upside potential. The effectiveness and profitability of trading options hinge on selecting the right option at the appropriate price. Traditionally, the Binomial option pricing model (BOPM) is employed to estimate the fair value of options. This study delves into the impact of factors such as underlying asset price, strike price, volatility, and period (with a constant interest rate) on put option values. Leveraging Taguchi's design of experiment methodology, the research aims to optimize these factors for option valuation, marking the first instance of such optimization using Taguchi's method. Through a design of experiment (DOE), analysis of variance (ANOVA), regression analysis, and analysis of mean (ANOM), the study examines the effects of input factors, employing MINITAB 18 software for analysis.