I told you BS was BS!

wxytrader said:
Well said, but regarding Black scholes, the model is too flawed to be used for real time pricing. For example, black scholes model uses call prices to calculate put prices...this in an inherent work around which displays the shortcomings of the model.

Implied volatility is calculated by taking the market price of the option, entering it into the Black-Scholes formula, and back-solving for the value of the volatility.

Where is the actual IV% derived from then, if you have to back solve for it in the same calculation that it is required in to calculate option prices? Nobody knows :)
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lol call to put conversions were done OTC before listed options were trading. It's the synthetic so it's best practice rather than calculating it independently using a vol-figure. It's not a work-around. WTF is wrong with you?
 
It doesn't matter what you use for relative value. Moaning about the model just shows me you don't use ANY model.
 
From Euan Sinclair,take it FWIW

I'm not sure if you are asking “the black scholes model is unreliable. What makes it that way?”, or “ in what particular circumstances will the black scholes model be unreliable?”.

I'll answer both. Because I'm cool like that. And I've just finished a 40 page chapter for my new book on this subject.

The black scholes model is very robust. It made a number of assumptions that were wrong. Some can be ignored. Some can be corrected in an ad hoc manner. Some need a more advanced model.

It assumes there is one interest rate. Actually there is a different rate for each maturity. BS is fine if you use the rate corresponding to the option maturity. It assumes rates are constant. Stock option models with stochastic rates have been developed but they do no better than B.S.. Same for fact that rates have bid ask spreads.

It assumes no dividends. Trivial adjustment.

It assumes no borrow costs. Trivial adjustment.

It assumes constant vol and normal returns. Many models have been proposed to fix this. None outperform B.S., when traders use a vol smile and adjust it periodically.

It assumes no transaction costs in the underlying. This is important as solving this leads to optimal and practical hedging strategies. Several models have been developed to do this. But BS is used and then the hedging strategy is overlaid on top.

It makes a number of assumptions about continuity, differentiability etc. Traders don t care. Makes no difference in practice.

Some people say B.S. breaks near expiration. These people are wrong.

B.S. is far from perfect. As a model of reality it is fairly poor. But as a practical trading tool it is excellent. All of the market making firms base their systems on it still.
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taowave said:
From Euan Sinclair,take it FWIW
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You forgot that it is recursive.

Calculating Implied VolatilityPlugging the option's price into the Black-Scholes equation, along with the price of the underlying asset, the strike price of the option, the time until expiration of the option, and the risk-free interest rate allow one to solve for volatility.

So you need IV to calculate price, but you need price to calculate IV?
 
Not sure where you are going with this...

You can solve for IV,or you can solve for Option Price..

Its either or...Whats bugging you?



wxytrader said:
You forgot that it is recursive.

Calculating Implied VolatilityPlugging the option's price into the Black-Scholes equation, along with the price of the underlying asset, the strike price of the option, the time until expiration of the option, and the risk-free interest rate allow one to solve for volatility.

So you need IV to calculate price, but you need price to calculate IV?
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