13 lines
898 B
Plaintext
13 lines
898 B
Plaintext
The Black-Scholes-Merton Model • 47
|
||
The fact that the theoretical basis of option pricing is provably wrong
|
||
is very good news for intelligent investors. The essence of intelligent option
|
||
investing involves comparing the mechanically determined and unreason-
|
||
able range of stock price predictions made by the BSM with an intelligent
|
||
and rational valuation range made by a human investor. Because the BSM
|
||
is using such ridiculous assumptions, it implies that intelligent, rational
|
||
investors will have a big investing advantage. Indeed, I believe that they do.
|
||
Now that we have seen how the BSM forecasts future price ranges for
|
||
stocks and why the predictions made by the BSM are usually wrong, let us
|
||
now turn to an explanation of how the stock price predictions made by the
|
||
BSM tie into the option prices we see on an option exchange such as the
|
||
Chicago Board Option Exchange (CBOE). |