Determining the Cost of Blockage by the Market-Derived Blockage Discount Model

Abstract

Using option models to determine blockage discounts has been a common practice for over twenty years. As with any technique, periodic updating and improvement is to be expected. We hope this article contributes to this end. The Market-Derived Blockage Discount Model presents a mathematical means for determining the appropriate selling period in a blockage “dribble out” analysis. If we sell too much at one time, the price impact is too great. If we create too long of a dribble out period, the cost of the option is too high. The optimum holding period is the one that achieves the lowest cost. Furthermore, it is our contention that the sale transaction(s) envisioned in the blockage analysis will have an immediate impact on the volatility of the stock price and that this marginal increase in volatility should be accounted for in the option model. What we have found from this model is that, depending upon the depth of a stock's market, blocks much smaller than previously presumed can create a measurable blocka...