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Traders use the Black Scholes Model to determine the values of various derivates and options contracts. The pricing through this model lets the traders see the impact of time and other factors on an asset’s price.

Since the Black Scholes Model is math-based, it does involve some calculations and formulas. This model is perfect if you wish to understand the perfect time for delving into a trade.

A trader trading derivates or engaging in binary options trading can use the following formula in line with this trading model.

The Black Scholes Model gives a formula to the traders who wish to know how the real price of an asset shall deviate. A trader can use this formula to ascertain the changes that could take place in the European Options.

(Price Action Binary Options Trading Example – Best Binary Options Trading Strategy https://www.youtube.com/watch?v=HfC37Sksx2Q)

This formula does not apply to the American Options because a trader can exercise them before expiration.

The mathematical formula for any model can be seen as intimidating to the trader. The beginner, especially, can feel haunted by looking at the formulas. It is because they don’t understand what to do with these equations, let alone use them to make their trading decisions.

But, don’t worry! The Black Scholes Model formula is not as intimidating as it may seem:

C = SN(d1) −Ke−rtN(d2)

Where,

d1=lnKS+(r+2σv2t)/σ under root t

d2=d1−σs under root t

C= Call option price

S= Current price of the underlying asset

K= Strike price

r= Risk-free interest rate

t= Maturity time

N = A normal distribution

A trader does not have to understand the intricacies of this model to use the formula. You can use this formula with analysis tools and various online calculators. These days online trading platforms offer various indicators and spreadsheets that allow the users to know the options pricing.

Let us understand how a trader can use the Black Scholes formula with the help of an example.

Suppose that a 6-month call option has an exercise price of $50. The asset currently trades at $52 and costs a trader $4.5. Let us also assume that the risk-free annual rate stands at 5%, and the stock’s return standard deviation is 12%. Considering this information, you might find yourself in a dilemma as to whether you should buy this option or not.

Using the Black Scholes Model formula, you can easily determine the call option’s value.

When this is done, you can finally compare it with the option’s current price to determine if it is worth the purchase.

Using the formula, after calculating d1 and d2 and applying the formula, the value of C will be $3.788. It indicates that the option you wish to exercise has a value lower than the premium. This result leads us to an assumption that the option is overvalued. Or, we estimate the volatility lower than it is.

Thus, Black Scholes Model is one of the best methods to determine whether you are moving in the right direction in options trading. All advanced traders use this model to calculate their potential earnings with options trading.

The best part about this model is that even beginners can use the Black Scholes formula to make the right trading decisions.

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