This segment delves into the math of volatility using the part of the Black-Scholes formula for pricing a call option to explain how an increase in volatility impacts the price of an option. Don't be afraid of the math because even those math challenged will gain something by watching this.
Those of you who fell asleep in a math or a finance class or never went probably never had a lecturer like Professor Jim Schultz. You may not understand all of his math but at least you'll learn to shake a fist when making an important point and you will be entertained.
Dr. Schultz calls the Black-Scholes pricing model elegant. His goal is to explain it to viewers and will try to do so in small chunks. His hope is that we can uncover some hidden gems together.
He starts by explaining the two sides of an options contract and what each side wants. Volatility is key for the buyer. Dr. Schultz uses the Black-Scholes formula for pricing a call option. He explains that volatility is “hidden” in parts of the formula. He explains where that is and then goes into more detail of those parts.
It first looks like the explanation is very simple for how volatility increases the price of an option. Jim explains that it isn't quite so simple but then makes understanding the concept quite easy. An increase in volatility increases the difference between the value of an option and the cost. He then explains why that is so.
Watch this segment of “From Theory to Practice with Dr. Jim Schultz to learn more about the math of volatility, the elegance of the Black-Scholes model and how to wave your fist when making an important point.
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