Lesson

Black-Scholes pricing model | Options Educator

Understand the five inputs — stock price, strike, time, volatility, and rate — and see how each one shifts theoretical value.

What you'll practice

  • After "Volatility up 5 points", predict which way each price moves: the call (option A) and the put (option B).
  • Raise the call's implied volatility (option A) until the call is worth about $4.80, within $0.10.

In this lesson

The Five Inputs

  • Four inputs are observable; volatility is the one you estimate
  • More time and more volatility raise both calls and puts
  • Stock price, strike and rate move calls and puts in opposite directions

Implied Volatility and What the Model Assumes

  • Implied volatility is the model run backwards from the traded price
  • Constant volatility is the assumption that fails first
  • Skew exists because the model's distribution understates crash risk
  • The model is best used for sensitivity, not for judging fair value

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