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This project is relatively simple. The key is to understand and profitably employ the Black-Scholes (BS) Option Pricing Model's output. Find an option on
This project is relatively simple. The key is to understand and profitably employ the Black-Scholes (BS) Option Pricing Model's output. Find an option on a public traded security. Take note of the current stock price, the option's strike price, the risk free interest rate, maturity, etc. as these variables will function as inputs into the BS. The variable that is not "a given" is volatility - or more specifically standard deviation - and importantly the one you must calculate for use as an input. Using your estimate of volatility (historical, projected, etc), calculate the value for the option using BS. With respect to the deliverable, In a paragraph that sums up the analysis, what is your actionable recommendation (i.e., should you buy or short the option)? Provide the simple explanation of the rationale that guides option analysis and trading (hint: use realized vs. anticipated volatility in your answer). Remember, this exercise, like so many in investments FIN369 and beyond, is focused on the price determined by everyone else in the market versus your valuation comparison.... As a part 2 of the deliverable, what is the implied volatility of your option. In a paragraph, explain how you could have used IV to make a trading decision.
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