Exploring the impact of input variables on option value: a study using experimental design and analysis techniques

Abstract

AbstractThe Black Scholes Model (BSM), a well-known approach for determining the fair value of options, has a long history. The price of the underlying asset, the strike price, volatility, time period, interest rates, and dividend yields are several of the input variables that have an impact on option pricing. This study intends to investigate the effects of these variables on option values. Taguchi’s methodology of design of the experiment is used for the experimental setup and to optimize the factors for option values. Taguchi method L27 design of experiment (DOE), analysis of variance (ANOVA), regression analysis, and analysis of means (ANOM) were used to investigate the effects of these input parameters on option values. MINITAB 18 software is used to carry out the analysis. The factors, in order of their significance from highest to lowest, were identified as: strike price, time period, interest rate, underlying asset price, volatility and dividend concerning to call option value for the given dataset. This technique can be used by traders to determine how various factors impact option values. The proportion contribution of these factors to the call values is also quantified using ANOVA.