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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 ...
Brythan's user avatar
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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 ...
Bob Baerker's user avatar
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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 ...
Fab's user avatar
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why volatility increases price for ITM call options?

Volatility is a measure of the expected price variance over time, up or down. Increased volatility means a wider range of expected prices, so the ITM call option is seen as both more likely to expire ...
Hart CO's user avatar
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why volatility increases price for ITM call options?

The answer by @Hart CO is intuitively correct but within a Black Scholes framework, this is actually quite a brain teaser as the probability of ITM options expiring ITM indeed decreases with ...
AKdemy's user avatar
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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 ...
user45011's user avatar
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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 ...
Peacock's user avatar
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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 ...
D Stanley's user avatar
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3 votes
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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 ...
Bob Baerker's user avatar
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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 ...
nanoman's user avatar
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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 ...
davmp's user avatar
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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 ...
dg99's user avatar
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2 votes

Implied or historical volatility to calculate theoretical options price with black scholes?

The answer by not-nick is wrong. At least for major exchanges like the CME (maybe there are some small exchanges with little option trading that use historical vol, but I would be very surprised). The ...
AKdemy's user avatar
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2 votes
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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 ...
not-nick's user avatar
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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 ...
nanoman's user avatar
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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 ...
D Stanley's user avatar
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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 ...
xirt's user avatar
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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 ...
ApplePie's user avatar
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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 ...
Bob Baerker's user avatar
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2 votes
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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 (...
Bob Baerker's user avatar
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2 votes
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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 ...
Bob's user avatar
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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 ...
nanoman's user avatar
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2 votes
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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 ...
AKdemy's user avatar
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2 votes

why volatility increases price for ITM call options?

Let’s say the strike price is $20, current price is $30, and little volatility. The expected change is $0, with a small variance, so the option is worth $10: You will get $10, or two dollars more, or ...
gnasher729's user avatar
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1 vote

Does Implied Volatilty factor in all known future events?

From every article I've encountered, the chicken and egg aspect suggests that IV is produced by looking at options pricing, and calculating the IV from that. The implication is that whatever is ...
JTP - Apologise to Monica's user avatar
1 vote

Is there intuition behind asymmetry in call and put prices?

The premium/price of a put option should be different than that of a call option. Relative put and call prices differ by the riskless rate of interest. So when interest rates rise, a call's price ...
JazKaz's user avatar
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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 ...
Bob Baerker's user avatar
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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 ...
farnsy's user avatar
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1 vote
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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 ...
Bob Baerker's user avatar
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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 ...
JTP - Apologise to Monica's user avatar

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