Alex Trias

Improving the Black Scholes Model

That's a very good point - and your point about ultra high volatility days does should go against my point on mis-pricing.

Thanks for your comment!

On Mar 18 11:50 AM F. Bradeen wrote:

> You are right for long term options of a year or longer to consider
> the long term trend, but there is a third very serious problem with
> the Black Scholes Model and that is the assumption of a Normal distribution.
> (Lets forget that stock returns are more log normal than normal for
> the moment.) The Normal or log normal distribution does not take
> into consideration the fat tails on both sides of the distribution.
> And let me tell you they are enormously fat. This will lead you to
> seriously underestimate the value of any option, whether long term
> or short term. In fact, I doubt any serious investor uses the Black
> scholes as it currently stands. If so, they WILL be wiped out on
> days like Oct. 19, 1987 where the market went down 25% in one day.