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While the challenges discussed in the first article were related to your risk/reward possibilities and included well-known data, the real information gap an option trader faces relates to the volatility, or the ‘implied volatility’. The definitions for these parameters are sometimes obscure, and more – not all volatilities are created equal. Sometimes (like before specific events) the expected volatility is built upon different assumptions than usual, and requires different arithmetic.
The BS model is popular not because it is always correct, but rather because it easy to handle. The volatility – and the assumptions around it – ... (read more)