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To: Stock Farmer who wrote (64058)5/15/2003 11:44:59 AM
From: GVTucker  Read Replies (2) | Respond to of 77400
 
It does this by estimating the expected future difference between strike and market price at time of exercise and discounting this back to present.

One more important factor needs to be added. Black Scholes also calculates a probability of a stock having an intrinsic value at the time of exercise by incorporating the stock's volatility into the equation.

And THAT is why Black Scholes does not predict an option's value. Because volatility cuts both ways, there is a probability implicit in the current price of the option that the intrinsic value of the option will be zero at expiration.



To: Stock Farmer who wrote (64058)5/15/2003 5:01:46 PM
From: RetiredNow  Respond to of 77400
 
Only if all inputs could be 100% accurate. Unfortunately, they are never 100% accurate. The worst case of bad estimates usually occurs during outlying events like the bubble years and the ensuing crash. That throws B.S. calculations way off, since the underlying estimates are usually way off.


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