Black Scholes Option Pricing
What is it? A model developed based on the theories of Brownian motion to price options. This model assumes has a few assumptions:- No arbitrage opportunities exist
- Borrowing and lending at the risk-free rate is possible
- The stock does not pay dividends
- Trading of the stock is continuous
- There are no transaction costs or taxes
- It is possible to short sell the security
- It is possible to buy fractions of shares
Many of these assumptions are not met in our options trading environment. These assumptions and their effects on the end result of the options model need to be taken into consideration when valuing options. Though there are flaws in the assumptions, Black Scholes is currently the most useful metric we have for valuing options.
Added By: Tyler
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