Black-Scholes Stock Option
The Black-Scholes model makes the following assumptions:
- The stock pays no dividends during the option's life.
- European exercise terms are used. European exercise terms assume that the option can only be exercised on the expiration date.
- Interest rates remain constant and known and volatility of the underlying are known and constant.
- No commissions are considered in the calculation.
- Markets are efficient and returns are lognormally distributed.
- This calculation gives a theoretical estimate of the price of European-style options.
Black-Scholes Formula
Black-Scholes Formula
The formula takes the following variables into consideration:
- current underlying stock price
- option strike price
- time until expiration, expressed in days
- implied volatility as percentage
- risk-free interest rates