Fix case where implied volatility is outside the initial range (#2)

Co-authored-by: Zois Pagoulatos <[email protected]>
kyosenergy · Feb 2, 2024 · 9657399 · 9657399
1 parent cfa12d9
commit 9657399
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Showing 3 changed files with 25 additions and 7 deletions.
diff --git a/composer.json b/composer.json
@@ -46,7 +46,10 @@
         "format": "vendor/bin/php-cs-fixer fix --config .php_cs.dist.php --allow-risky=yes"
     },
     "config": {
-        "sort-packages": true
+        "sort-packages": true,
+        "allow-plugins": {
+            "pestphp/pest-plugin": true
+        }
     },
     "minimum-stability": "dev",
     "prefer-stable": true

diff --git a/src/Black76.php b/src/Black76.php
@@ -3,6 +3,7 @@
 namespace Kyos\OptionsCalculator;
 
 use Exception;
+use RuntimeException;
 
 class Black76
 {
@@ -15,7 +16,7 @@ class Black76
     private float $interestRate;
 
     /**
-     * @param float $interestRate Annual risk-free nterest rate, defaults to 0.01 (1%)
+     * @param float $interestRate Annual risk-free interest rate, defaults to 0.01 (1%)
      */
     public function __construct(float $interestRate = 0.01)
     {
@@ -99,6 +100,8 @@ public function getValues(
      * @param float  $marketPrice     Option price
      *
      * @return float
+     *
+     * @throws RuntimeException
      */
     private function impliedVolaUsingBisection(
         string $type,
@@ -113,8 +116,16 @@ private function impliedVolaUsingBisection(
 
         $volMin = 0.00001;
         $volMax = 5;
+        $volGuess = $volMin;
+
+        $valueMin = $this->getValues($type, $underlyingPrice, $strikePrice, $timeToMaturity, $volMin)['value'];
+        $valueMax = $this->getValues($type, $underlyingPrice, $strikePrice, $timeToMaturity, $volMax)['value'];
 
-        do {
+        if ($marketPrice < $valueMin || $marketPrice > $valueMax) {
+            throw new RuntimeException("Implied volatility could not be found in the range {$volMin} - {$volMax}.");
+        }
+
+        while (++$i < $maxIterations && ($volMax - $volMin > $epsilon || $valueMin != $valueMax)) {
             $valueMin = $this->getValues($type, $underlyingPrice, $strikePrice, $timeToMaturity, $volMin)['value'];
             $valueMax = $this->getValues($type, $underlyingPrice, $strikePrice, $timeToMaturity, $volMax)['value'];
 
@@ -126,7 +137,7 @@ private function impliedVolaUsingBisection(
             } else {
                 $volMax = $volGuess;
             }
-        } while (++$i <= $maxIterations && $volMax - $volMin > $epsilon);
+        }
 
         return $volGuess;
     }

diff --git a/tests/Black76Test.php b/tests/Black76Test.php
@@ -34,11 +34,15 @@
     $this->expect((new Black76())->getImpliedVolatility(Black76::PUT, 10.5, 12, 30 / 365.25, 1.7398186455107651))->toEqualWithDelta(0.60, 0.00000000000001);
 });
 
-// Expections
-it('throws expection if we try to derive implied volatility using newton rapshon', function () {
+it('throws exception if implied volatility is outside the initial range', function () {
+    (new Black76())->getImpliedVolatility(Black76::PUT, 10.5, 12, 30 / 365.25, 1);
+})->throws(RuntimeException::class);
+
+// Exceptions
+it('throws exception if we try to derive implied volatility using newton rapshon', function () {
     (new Black76())->getImpliedVolatility(Black76::PUT, 10.5, 12, 30 / 365.25, 0.240, Black76::METHOD_NEWTON_RAPHSON);
 })->throws('Not implemented');
 
-it('throws expection if we try to derive implied volatility using wrong method', function () {
+it('throws exception if we try to derive implied volatility using wrong method', function () {
     (new Black76())->getImpliedVolatility(Black76::PUT, 10.5, 12, 30 / 365.25, 0.240, 99);
 })->throws('Wrong method 99 or not supported');