7
votes
Accepted
What is the Meaning of the Black-Scholes Value?
Using the data, the call option is $2.34, but what exactly does that mean? Does that mean the buyer has the obligation to buy the stock for $2.34?
No, a call option is when someone purchases the ...
- 21k
4
votes
Does the Black-Scholes Model apply to American Style options?
Just a few observations within the Black-Scholes framework:
American calls have the same price as European calls on non-dividend paying assets.
The Black-Scholes formula is applicable only to ...
- 309
4
votes
What is the Meaning of the Black-Scholes Value?
Black-Scholes is one of several pricing models that uses six variables to determine the theoretical value for an option. You mentioned five of them. You did not mention a dividend so it is assumed ...
- 75.7k
3
votes
Accepted
Implied or historical volatility to calculate theoretical options price with black scholes?
Option pricing models used by exchanges to calculate settlement prices (premiums) use a volatility measure usually describes as the current actual volatility. This is a historic volatility measure ...
- 6,400
3
votes
Accepted
Does Implied Volatilty factor in all known future events?
In short, yes. Implied volatility will capture any expected upcoming material announcements.
There is also supply/demand impact bundled in which may inflate an option price, and by extension increase ...
- 436
3
votes
In option pricing formulas, is the volatility and short rate a decimal or a percentage?
do we enter them as percentages or decimals?
As a decimal. A "20%" annualized volatility would be entered as 0.2 in the Black-Scholes model
I am not just looking for an answer, but also an ...
- 130k
3
votes
Can the Delta be used to calculate the option premium given a certain target?
One thing I would like to clear up here is that Black Scholes is just a model that makes some assumptions about the dynamics of the underlying + a few other things and with some rather complicated ...
- 51
3
votes
Accepted
Is it important to understand option pricing models before trading options?
I've utilized options on the retail level for well close to 40 years, starting with basic strategies and evolving into more complex strategies, particularly hedging. I wrote utilized because I have ...
- 75.7k
2
votes
How does a delta signify the probability of expiring in the money
What the other answers seem to miss is that there isn't just a vague or qualitative relation between delta and the probability of expiring in the money. Though the two are not equal in general, there ...
- 29.4k
2
votes
Effect of company issued options on share price
A company has 100,000 shares and 100,000 unexercised call options (company issued). Share price and strike price both at $1.
What country is this related to? I ask because, in the US, most people I ...
- 2,283
2
votes
Effect of company issued options on share price
The answer to your question as asked is no. Call options, even those issued by the company, cannot create new shares unless they are employee stock options.
Company-issued warrants, on the other ...
- 6,047
2
votes
Does Black Scholes exhibit the volatility smile?
The Black-Scholes model was based on assuming lognormal stock price fluctuations with a constant volatility. However, the modern practice is to use the Black-Scholes formula not as a prediction but ...
- 29.4k
2
votes
Does Black Scholes exhibit the volatility smile?
If we were to observe some call price (e.g., 15), and then derived implied volatilities from the BS formula depending on different strike prices but fixed maturity (i.e, maturity = 1, and strike goes ...
- 130k
2
votes
Black scholes, futures, and American vs. European options
I don't think your understanding is correct. The main difference between American-style and European-style option is the timing of the right to exercise the option. In American-style options, the ...
- 2,269
2
votes
Difference between deltas of American vs European Call options
Is there a difference in the value of Delta of American and European options with the same underlying asset price, strike price, time to maturity?
Probably. The difference between American and ...
- 5,083
2
votes
Calculate OTM premium from implied volatility?
I'm not sure why you would want to do such a calculation because if the option trades, the premium is available from the market. Be that as it may, yes, you can use Black Scholes to generate a rough ...
- 75.7k
2
votes
Accepted
What causes option prices to differ from Black-Scholes model so vastly?
Theoretical option prices will vary from actual for several reasons:
Implied volatility tends to be higher for nearer term expirations
Implied volatility can vary from strike price to strike price (...
- 75.7k
2
votes
Accepted
Option strategy, Black, Scholes and Merton Model and Lognormal distribution
If you have a distribution of stock prices then the lower limit is 0. However, if the position is the stock plus a (long) put position then the value of the position cannot be less then the strike ...
- 1,538
2
votes
Accepted
Why do implied volatility changes at different strike prices exactly coincide with one another?
It does not suggest manipulation. To quote another answer:
The efficient market hypothesis implies that the key driver of stock price changes is not trading volume but predictive information.
The ...
- 29.4k
2
votes
Accepted
What are alternatives to Black-Scholes model that doesn't assume random walk behavior?
With regards to a comment you made; how can you be sure you get everything else correct if your value is so wrong? With FX, there are two interest rates, IVs are usually quoted in delta (frequently ...
- 2,451
1
vote
does bid and ask volume affect option price
Volume has nothing to do with option pricing but it does affect price. What does that mean?
An option's theoretical price is determined by the price of the underlying, the strike price, the time ...
- 75.7k
1
vote
What do the d's in this financial derivatives equation mean?
People in probability and finance theory to use this notation to write integral equations describing the behavior of continuous time stochastic processes (L, in this case). It's an informal shorthand ...
- 15.1k
1
vote
Accepted
How do I know what option on a particular stock X will move the most?
The Captain Obvious answer is that the call with the highest delta will move up the most (price wise) if you prediction comes true. The not so obvious question is which option will have the largest ...
- 75.7k
1
vote
Crash O Phobia and the reason for higher pricing of out of the money puts
With the disclaimer that I acknowledge that Bob (the member whom I consider our resident expert and author of the current answer) is a few levels above me in options knowledge, I'll offer a layman's ...
1
vote
Crash O Phobia and the reason for higher pricing of out of the money puts
If you plot implied volatility (IV) against strike prices, several curves occur:
Volatility Smile is a U-shaped curve
Reverse Skew (aka Volatility Smirk) is where lower strikes have higher IV ...
- 75.7k
1
vote
Accepted
Does sigma in Black-Scholes attempt to take into account future events?
Black-Scholes is a classic case of "all models are wrong but some are useful".
Black-Scholes is a formula that tells you what the price of an option would be if:
The stock's returns are log-...
- 2,781
1
vote
How to calculate Black-Scholes using Google Sheets?
I'm not familiar with this form of Black-Scholes (d1, d2, C), but the original q was regarding NORMDIST, is there a chance that NORMDIST and NORMSDIST are being confused?
NORMDIST - 4 arguments, the ...
- 111
1
vote
Accepted
How to calculate Black-Scholes using Google Sheets?
I don't use Google sheets nor am I very good with Excel so I'm not sure how much help this will be.
I wrote the Black Scholes formula in a spreadsheet 25+ years ago, back in the days when BS software ...
- 75.7k
1
vote
For a gain of +$X on the underlying security, would the gains on a single LEAP be identical to the gains on 100 shares of that security?
The delta matters, how far in the money or out the money. you should really use a calculator that shows you projections.
I'm a fan of Thinkorswim's platform for simulating options PnL
- 20.2k
Only top scored, non community-wiki answers of a minimum length are eligible