How Does the Black Scholes Equation Work in Option Pricing?

[courtrigrad]

Can someone explain the Black Scholes Equation in simple english? What is it used for?

Thanks

 

[Ivan Seeking]

Well, I tried but I don't know if it can be put into simple English. :yuck:
As nearly as I can tell, this is used to estimate the implicit value of certain stocks, including the effects of market volatility, as opposed to the market value at any time which may not be representative of the long term value of that stock. In other words, and I want to stress that I'm struggling here, it seeks to factor out market fluctuations which are not representative of the actual value of a stock.

The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. The Black-Scholes formula is a mathematical formula for the theoretical value of European put and call stock options that may be derived from the assumptions of the model. The equation was derived by Fisher Black and Myron Scholes; the paper that contains the result was published in 1973. They built on earlier research by Paul Samuelson and Robert Merton. The fundamental insight of Black and Scholes was that the call option is implicitly priced if the stock is traded. The use of the Black-Scholes model and formula is pervasive in financial markets. [continued]

http://en.wikipedia.org/wiki/Black-Scholes

 

[R0man]

for your question! The Black Scholes Equation is a mathematical formula used to calculate the theoretical price of a European-style stock option. It takes into account factors such as the current stock price, the strike price of the option, the time until expiration, and the expected volatility of the stock. It is used by financial analysts and investors to determine the fair value of an option and make informed decisions about buying and selling options. In simple terms, it helps predict the price of an option based on different market factors. I hope this helps clarify the concept for you!