Pricing European Options with Actual Implied Volatility Distributions

Pricing options is an important issue for not only financial management but also cross field applications. However, most option pricing models apply mathematical distributions that cannot successfully describe actual behaviors of the underlying assets. Some researches have proved that using implied volatility can greatly improve pricing performance of traditional option pricing methodologies. In line with these discoveries, this paper introduces an innovational methodology to price European options with actual implied volatility distributions collected from historical samples. The empirical pricing performance test indicates that this pricing methodology with significantly smaller pricing error compared to Black & Scholes pricing model.