OptionVue6: Yates Adjustment

Discussion in 'Options' started by matador04, Oct 23, 2009.

  1. Len Yates of OptionVue6 adjusts the BSM model to reflect the possibility of early excercise... does anyone know what the adjustment is? In OptionVue software, there are 3 available models to price theoretical prices on any given strike: cox/ross/rubenstein, BS, Yates.

    A little help would be appreciated if you know what the adjustments are and what his formula is to come up with pricing.

  2. For American options, use the binomial model (out of the three models you have listed).
  3. Nanook


    Assuming you have OptionVue software: Go to the online Help menu, select Search option and key in "Yates Model".
  4. The Yates Model

    The Yates model was developed in-house at OptionVue Systems International with intensive research and testing. It is a refined Black/Scholes model that takes into account dividends and the possibility of early exercise.

    When used for American call options, the Yates model is actually nothing more than the so-called pseudo-American call option pricing model. When used for American put options, the Yates model is also based on the pseudo-American model. However, it includes a factor that adjusts for the possibility of early exercise, which is Len Yates' unique contribution. The effect of the Yates adjustment is to bend the put valuation curve upward at the left (in-the-money) end just enough to lift it above the "parity" line.

    The Yates adjustment formula assures that most of the bending occurs in the near-the-money area of the curve, with proportionately less bending as you go farther in or out of the money. Coefficients were optimized to produce minimal error as compared with the C/R/R model at a high resolution (50), using data from a wide variety of situations.

    The Yates model has the combined benefits of speed and accuracy. The
    performance impact of the adjustments to the original Black/Scholes is minimal. On average, the model takes 2.2 times longer than the pure Black/Scholes. Still,
    the model clocks in 50 times faster than the Cox/Ross/Rubinstein model.
    The Yates model has been thoroughly tested for accuracy. In thousands of test cases spanning a wide variety of dividend, interest rate, and volatility scenarios, answers from the Yates model differed, on average, less than 1% from the C/R/R model at high resolution.

    Although you may select the Yates model for all assets, the program does not use the actual Yates model in all circumstances. When evaluating European style options, the program is actually using the B/S model. When evaluating futures options, the program is actually using the Black model.

    For a thorough discussion of option pricing, the reader is referred to these two excellent books:
    • Options Markets by Cox and Rubinstein.
    • Option Pricing by Jarrow and Rudd.