Black Scholes

I’ve skipped that part. I have a question What is the difference in price of an option (call option) if the price of underlying decreases, considering from delta point of view and from Black Scholes point of view? Why? Thanks for the help

is this in an LOS?? my heart skipped a beat when i saw the thread title…

don’t think so

What do you mean “considering from delta”?? I don’t get the question… If the value of underlying decreases, value of the call will be less, because it will be either less in-the-money or more out-of-the-money

the price of the option will change in a way using the delta of the option and it will have a bigger or smaller change using the Black Scholes method

Using Delta will result in a bigger change in price than using B-S. B-S has positive convexity, while Delta is a straight line.

thanks basically then delta only includes delta while Black scholes includes a gamma component as well?

Black Scholes inputs: Spot Price (underlying) Strike Price (fixed) Risk free rate Time to maturity Volatility. Black Scholes formulas, while complicated, are easy to understand conceptually when you think of a normal distribution and probabilities. The formulas basically try to estimate the probability in a normal distribution that the spot will be above or below the strike given the other inputs. If volatility is higher in a call and the spot is below the strike, holding all else equal, the spot has a better chance of hitting the strike because it could go up more (or down more). Just like if it has more days to rise to the spot, it will be worth more. Black Scholes does account for gamma, and if you ever model the formulas in excel, you can see how the numbers change out of the money, at the money, and way in the money.

So I found this in Schweser which confirms fwvagabond’s ideea but just to add Delta underestimates increases and overestimates decreases in the value of a call option. this relates to Mwvt9’s question about duration for a bond. My question is what would be the case for a put option?