As part of the TIA Technical Skills Course, there is a final capstone project that is quite open ended. The best analysis will be posted in this TSC blog.

Option Price analysis in MS Excel by Scott K.

Goal: To use option analysis to read the tea leaves of the investment community on the future of CNO.

I also went to yahoo finance and downloaded the adjusted closing historical prices of CNO, my goal here was to calculate a reasonable implied volatility and annualize it by multiplying by the square root of 252 (the number of business days in a year).

I used the standard deviation from the last 33 stock prices, I wanted above 30 so that I had enough prices for my standard deviation statistic to be meaningful but I also wanted a reasonable number of days because I don’t think the investment community uses very many historical days to price options, 33 days sounded right to me.  The produced an annualized implied volatility of 0.254.

I used the implied volatility 0.254 in the Black-Scholes pricing model along with the following parameters:

Days=16/365 because there are 16 days left until maturity from today

Stock Price= 18.38

Strike Price = 18

Risk free rate = 0.0007 (this is probably accurate enough, but after reading the paper, risk free rate could be probably closer to zero now)

Using these parameters, I calculated the BS value of the long call position to be 0.6057.

Comparing this to the actual price today, of 0.31, I am a whole 30 cents off, what gives?

I use the data table technique that TSC covers, and calculate the value of the long call using all the implied volatilities available to me, and the volatility that produced the smallest difference in magnitude of price between the Black-Scholes equation and the actual market was 0.188, the volatility from using stock prices up to 5/13/2015 (which is the history of the past 13 stock prices only).

What does this tell me?  This tells me that the investment community actually believes that the price of CNO is so stable that it doesn’t need as much history as I believed it did to evaluate its volatility and price it.  Therefore, I believe the investment community believes CNO will probably not change very much in stock price between now and June 19.

For a visual, I created a binomial stock price model to illustrate that if someone owned a long position for this particular 18 strike CNO call, the binomial model advices that the investor should hold onto it at this time because the intrinsic value of the call is greater if it were held for longer instead of being used immediately today.

Want to build up your actuarial technical skills? Enroll in TIA Technical Skills Course, today.