Question

How do I use the black Scholes model to find the value of a call option and the value of a put option for each stock? I am doing two companies, apple and coca-cola.

Answer 1

The Black-Scholes model is used to price European options ( y p) which assumes that they must be held to expiration) and related custom derivatives. It takes into account that you have the option of investing in an asset earning the risk-free interest rate. It acknowledges that the option price is purely a function of the volatility of the stock's price (the higher the volatility the higher the premium on the option). Black-Scholes treats a call option as a forward contract to deliver stock at a contractual price, which is, of course, the strike price.

C = price of a call option

P = price of a put option

S = price of the underlying asset

X = strike price of the option

r = rate of interest

t = time to expiration

s = volatility of the underlying

N represents a standard normal distribution with mean = 0 and standard deviation = 1