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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Barbara Barry who wrote (8928)	11/21/1997 6:45:00 PM
From: Bearded One	Read Replies (1) \| Respond to of 18056

Black Scholes starts to fail when you move deep out of the money. The reason is that it doesn't account for changes in volatility that occur when a stock makes a big move. A stock at $100 may be very volatile until it makes a big change, and then lose volatility. That's why sophisticated options strategies employ a very frequent buying and selling of options with frequent re-estimations of volatility. Basically, if you buy an out of the money option, you're probably paying enough premium to make it not worth it according to Black-Scholes. Instead, you're making a bet that the stock is going to go in your direction.