Better Approaches to American Style Option Pricing:

Director of Quantitative Analysis, David Hrencecin discusses the Whaley and Ju-Zhong models, which are both analytic approximation methods for getting American option prices and greeks under the standard lognormal framework. The talk outlines how the two models are related, and compares their pricing performance over a range of inputs.

The Whaley approximation model for pricing American style options was introduced in 1987, and it has since become widely accepted as a standard for fast pricing for traders in the markets.  In 1999, following the same approach used to derive the Whaley model, Ju and Zhong published a refinement to the Whaley approach. Their model has also been embraced by the financial community, as an improvement to Whaley.

  •     The speed of calculation for both models is roughly the same
  •     Ju-Zhong pricing is more accurate in regions where Whaley is less accurate, particularly for options with time to expiration greater than one year
  •     Whaley pricing can be more robust for short-dated option pricing, so it’s recommended to consider both models, depending on the products that are traded