Can someone help me understand why constant volatility of the return of the underlying stock needs to hold? I thought the whole point of options is that we need volatility in the underlying stock? IF there is no volatility then there is little value of the embedded option no?

You don’t know what volatility will be like 1 month down the road.

remember that BSM is only good for European options too…so vol that increases the value of early exercising is worthless

kellyc319 Wrote: ------------------------------------------------------- > Can someone help me understand why constant > volatility of the return of the underlying stock > needs to hold? > > I thought the whole point of options is that we > need volatility in the underlying stock? IF there > is no volatility then there is little value of the > embedded option no? It doesn’t mean no volatility, just constant volatility. So maybe a set standard deviation.

can you expand niblita

I think its just an assumption to make things easy. You don’t know what the volatility will be in the future so you just assume it stays the same. JDV will definitely give you the proper answer if he chimes in.

What Up Girl… This was from 3PM right? I think it was at least… you are confusing Volitility with the LEVEL of volitility. They are saying the LEVEL of volitlity must remain constant. Not that the price should remain constant. Let me know if that helps

Shiet you people are fast. I cant type very well

Thanks AFJunkie that helps alot. You’re right, i was thinking no price movement for a moment and got stuck. I will just think as a set variance = constant volatility. Yes this was 3pm.