In this video, I break down the Black-Scholes model, the Nobel Prize-winning formula that revolutionized options pricing. You’ll learn what the formula is actually doing, why bell curves appear in the equation, and what d1 and d2 represent. I walk through each input — stock price, strike price, time to expiration, risk-free rate, and volatility — and show how they combine to produce a theoretical call option price. I also run through a complete numerical example so you can see the calculation from start to finish. Plus, I cover the key assumptions behind the model and why real-world traders adjust for things like volatility smiles and fat tails. Whether you’re studying for a finance exam or trying to understand how options are priced on Wall Street, this video gives you the intuition behind Black-Scholes.
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Chapters
0:00 – Introduction to the Black Scholes Model
0:47 – The Pricing Problem Before 1973
1:33 – Call Option Payoffs
2:15 – The Black-Scholes Formula
3:10 – Understanding d1 and d2
4:00 – The Normal Distribution in Black-Scholes
7:36 – Worked Example with Real Numbers
9:16 – Assumptions & Limitations
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*Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.
