Option Pricing without Black-Scholes Illustration
Abdulla Javeri
30 years: Financial markets trader
In the first video on this topic, Abdulla discussed option pricing without using the Black-Scholes model but left a few unanswered questions. In this video, Abdulla will cover those remaining questions relating to the appropriate probability distribution to use, the volatility of the asset, how far away the spot is in relation to the strike, the forward price and the time to expiry.
In the first video on this topic, Abdulla discussed option pricing without using the Black-Scholes model but left a few unanswered questions. In this video, Abdulla will cover those remaining questions relating to the appropriate probability distribution to use, the volatility of the asset, how far away the spot is in relation to the strike, the forward price and the time to expiry.
Option Pricing without Black-Scholes Illustration
5 mins 12 secs
The price of an option is the present value of the total probability weighted payoff. However, there are some discrepancies in the calculations when compared with the Black-Scholes method. These are outlined below for changes in spot/strike prices, interest rates, time to expiry and the volatility.
Key learning objectives:
What is the future probability distribution?
What is the volatility of the underlying asset?
How far away is the spot in relation to the strike, the forward price and the time to expiry?
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The Black-Scholes Merton option pricing model is the Nobel Prize winning formula that is used as the basis of pricing options. In this video, Abdulla will discuss option pricing without Black-Scholes and in doing so it will provide hints to understanding the more complex area of option Greeks which will be covered in the second video on this topic.
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