Simple question about options
- Thread starter rbigsby
- Start date
Not exactly.
"Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula"
Authors: Espen Gaarder Haug, Nassim Nicholas Taleb
https://www.researchgate.net/public...e_Black-Scholes-Merton_Option_Pricing_Formula
https://nassimtaleb.org/2022/02/black-scholes-equation/
A somewhat imprecise but better answer would be "supply and demand, with market makers picking up the slack."
Just curious: what do they use instead?
Do they maybe have found a better algorithm than the BSM algorithm? I doubt
Everybody has his/her own opinion about what the price should be.
If seller and buyer agree upon on the price then a trade occurs.
Ie. supply and demand determines the price.
Implied volatility (IV) tells the same, in the language of maths.
Just play with an options calculator: https://optioncreator.com/options-calculator
And read the details of the Black-Scholes-Merton option pricing model at wikipedia.
Better yet buy a textbook for beginners interested in options.
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maybe few participants submit their bid/ask price without black scholes calculation, but by and large , cobe uses such modified model. I did a calc back in the days, only variations can be explained by different borrowing costs and volatility numbers, which are tailored to each participant. you can submit a wild spread but may not get filled.
Really? Where did those "volatility numbers" come from?
Tip: vol is backed out of the BSM (or whatever model you're using.) The formula can't give you a price without a vol figure; if you think it does, imagine a brand-new ticker and tell me how you're going to price it without any buyer/seller input. Or how the BSM will deal with buyers piling into a strike and progressively lifting the bid because there are no sellers.
Jump-diffusion model for short term volatility calc, but of course prop firm can always improve the data and submit a spread, or to make market.
Factors That Determine Option Pricing
https://www.investopedia.com/trading/factors-determine-option-pricing/
https://www.investopedia.com/trading/factors-determine-option-pricing/