the Black-Scholes formula prices

How do you price a gamble on a stock's future price?

Imagine you're betting on the price of a stock in the future. You want to know how much to pay now for the chance to win big later.

Think of a stock's future price as a risky bet. The Black-Scholes formula helps you figure out the fair price to pay for that bet, considering how risky it is and how much time until you win or lose.

Example

If you think a stock will be worth $100 in a year and there's a 50% chance it will be that way, the Black-Scholes formula helps you decide how much to pay for that chance now.

Remember this

The Black-Scholes formula gives you a fair price to pay for betting on a stock's future price.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

Lattice model (finance)

How can you price an option that doesn't expire?

Black–Scholes model

How can you predict the price of an option?

Real options valuation

Why can't we always predict the future in business?

Write the Black-Scholes formula for a European call option: C = S·N(d₁) - K·e^(-rT)·N(d₂)

C = S·N(d₁) - K·e^(-rT)·N(d₂)

the Black-Scholes assumptions are

Why can’t we always predict stock prices perfectly?

put-call parity states: C - P = S - K·e^(-rT)

Ever wondered how options and futures can be linked?

Educational content, not financial advice.

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