A Simple Option‐Pricing Formula

Abstract

A simple option‐pricing formula based on the Weibull distribution is introduced. The simplicity of the algebraic form and ease of implementation are comparable to those of Black‐Scholes. Application to S&P 500 options shows that the pricing biases present in the Black‐Scholes model are eliminated. Prices produced by the presented model generally lie within or close to the bid‐ask spread. For long‐term options (over one year), the Weibull formula exhibits significantly higher precision than the Black‐Scholes formula does. While a rigorous comparison of all available models is necessary, the simplicity and precision of the proposed model are its main advantages over the existing models.