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Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition by Sheldon Natenberg

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 18

The Black-Scholes Model

Because of its importance as a foundation of option pricing theory, as well as its widespread use by traders, it will be worthwhile to take a closer look at the Black-Scholes model.1 The discussion in this chapter is not meant to be a rigorous or detailed derivation of the model, which is better suited to a university textbook or to a class in financial engineering. Rather, we hope to present a more intuitive discussion of the workings of the model, as well as some observations on the values generated by the model.

Initially, rather than calculating the theoretical value of an option, Black and Scholes tried to answer this question: if the stock price moves randomly over time, but in a manner that is consistent with ...

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