Black Scholes failing to solve near expiration

  • Thread starter Thread starter Adam G
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Adam G

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12/27/07
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I am trying to calculate the implied volatility of equity options on expiration day. However, sometimes the iteration never converges on a solution. This occurs even when I manually set the starting guess close to the actual IV. I have tried Newton's and Halley's method and the same behavior occurs.

I was wondering if this behavior could be caused by the convergence method or just from the fact that it is difficult to price options close to expiration.
 
Run your code in whatever debugger you have. Near expiry the price of the option will be very close to intrinsic; your iteration is probably hitting a negative vol.

Use boundary checking, or use a method such a false position that keeps the iteration on a specified interval.
 
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