Options Pricing

What is Option Convexity? Option Convexity refers to the curvature or second derivative of the option’s price with respect to the underlying asset’s price. This term can sound intimidating, but in…

The Black-Scholes-Merton model is one of the most well-known and widely-used frameworks in the world of finance. Its introduction revolutionized the way traders approach option pricing and risk manag…

Calculating Historical Volatility with Log Returns Begin with daily closes, convert them into log returns, subtract the mean, square, average, and square-root. Multiply the resulting daily sigma b…

From Complicated Securities to Simple Models Every financial instrument “derives” its value from something else—a bond from interest rates, a stock from future cash flows, a cryptocurrency from sh…

The Binomial Hedge: Bootstrapping Toward Black-Scholes Start with a toy world: a $100 stock that can jump to $200 or drop to $50. A call with a $120 strike will be worth $80 in the up-state and ze…