Spent the day reading theory on options and thought of sharing one nice article called "Holes in Black Scholes Model". It can be found here.
I am not sure in the Indian context if option traders use pricing models as I have observed people trading in a fashion as if options are the leading indicators and not 'derivatives'. Perhaps this is effective in our country.
The paper is written by Fischer Black. Black states that the model is based on 10 incorrect assumptions. The two main ones which I think are relevant to the Indian context are:
1. Volatility is known and doesn't change over the life of the option
2. Price change of underlying is smooth (there are no gap ups or gap downs)
I am not sure in the Indian context if option traders use pricing models as I have observed people trading in a fashion as if options are the leading indicators and not 'derivatives'. Perhaps this is effective in our country.
The paper is written by Fischer Black. Black states that the model is based on 10 incorrect assumptions. The two main ones which I think are relevant to the Indian context are:
1. Volatility is known and doesn't change over the life of the option
2. Price change of underlying is smooth (there are no gap ups or gap downs)
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