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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 20304  
Subject: What is the Black-Scholes option pricing model? Date: 7/12/2013 11:20 AM
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For one it's a Nobel Prize winning piece of statistical mathematics that produces an answer that no one could figure out before (that does not necessarily mean that it is THE correct answer).

Briefly, the model assumes that the most likely price of a share at any time in the future is exactly the same as the price right now. How right can that be? To give this supposition some validity they actually use a normal distribution about the current price. Except that share prices are not normally distributed! They follow a power law distribution, like earthquakes. The normal distribution is adjusted by the stock's volatility except that no one can know what the volatility will be in the future. So they use history.

What is the Black-Scholes option pricing model? It's a method whereby you use an improbable assumption, the wrong distribution pattern adjusted by an unknowable volatility factor to come up with a precise price for an option. For that you get a Nobel Prize!

ROFLMAO

Denny Schlesinger
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