Memorize BS model?

Whether you believe it will be required to know the Black-Scholes model or not, does anyone have an intuitive way of thinking through/memorizing this beast of a formula? I write it out every night before sleep and then dream about it while sleeping, but it still makes no intuitive sense to me… any thoughts?

I should mention I’m posting this because Stalla’s passmaster problems require you to know the formula and I’ve missed every one of them.

Only need to know how to get implied volatility and what a change in one of the inputs would affect price. eg increased volatility = increase in option value.

^^ agree with niblita. The model more or less just spits out the same variables that affect options value - time, interest rate, volatility etc.

I may be mistaken, but for some reason I remember interest rates affect calls and puts differently. Am I make something up?

you’re right on Nibby - an increase in Rho (interest rates) will increase price of a call and decrease price of a put

well thanks for the input you two - I should probably spend more time just writing the table of greeks and their effect on call and put prices.

If i remember right, there was a question on the test last year on BS. The BS formula was given. If we were required to learn the BS formula, then that would be some BS!

ok, thanks for this thread… and from sounds of it, you have to understand how to apply the model, which still isn’t trivial, but can be learned fairly easily. i’ve made the decision to not to memorize black and scholes, as apparently have most, and if the LOS is wrong, we’re all screwed.

I think we should focus on concepts, assumptions, conclusions, relationships and not formulas.

What would you with it if you had it? You can’t plug numbers into it with a calculator because you would make gajillions of mistakes and the approved calculators don’t have a normal cdf (I think). You can’t figure out greeks from it during the exam unless you are really quick with your calculus. You certainly can’t back out implied vol from option price because that needs to be done numerically. There is no chance they will ask you a question which requires that formula.

I love Joey’s thread on BS where he walked through it conceptually- I cut and paste the whole dang thing into a document and am studying it along with CFAI readings… It was a thread sometime in August of last year, priceless stuff.

^ That would be important hottie, if you could bump that thread for us.

Dont u guys love inconspicuous flirting inbetween threads…?

I can’t find the thread now- Joey, can you find it? And BTW, I wouldn’t dare flirt with Joey, he’s cyber slapped me a couple of times on this forum before. I’m not into S & M, thank you very much!