Hacker News new | comments | show | ask | jobs | submit login

I'm going to get flamed for this, but promulgating Black-Scholes as the "standard way" to price options is a little misleading. A better choice of word would be "conventional", but that's also inexact because the BSM is broken, since BSM makes a lot of unrealistic assumptions for the model to work. The point is that there is no One True Pricing Model... the price is what the market thinks the value is. Too many people who should know better get it all mixed up, with disastrous effects.

It's not really flame-worthy because you're mostly right. I do however, think Black-Scholes is an appropriate starting point for options theory, even if it's not used a ton in practice. Without some sort of framework, you're effectively lost. I doubt many people could realistically develop any sort of options based strategy (besides simple leveraged long / short of the underlying) without a deep inside-and-out understanding of the BSE. The reason being not that you need to use it to calculate anything, but because it lays out a straightforward conceptual model of how various greeks interact with each other.

Of course, understanding the shortfalls of it are equally important. But the same could be said of DCF, P/E or any other valuation method.

Yes, Black-Scholes is a good benchmark model, i.e., something to compare other models to. For example, through the implied volatility surface.

Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | DMCA | Apply to YC | Contact