Black and Scholes Model

Black and Scholes Model

A relatively complicated mathematical formula for valuing stock options. The Black and Scholes Model is used in options pricing to determine whether a particular option should be selling at a price other than the one at which it currently trades.

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Black and Scholes Model

A model for mathematically pricing options. The model takes into account the strike price, the time until the expiration date, the price of the underlying asset, and the standard deviation of the underlying asset's return. The model makes three basic assumptions. First, it assumes that the option can only be exercised on the expiration date. It also assumes a risk-free return and that the volatility of the underlying asset remains constant throughout the life of the contract. The calculation is slightly different for calls and puts. See also: Option Adjusted Spread, Option Pricing Curve.