The End of Black Scholes?

Posted on Mo 11 Februar 2008 in misc • 1 min read

  • Options
  • Stocks tags:
  • Options
  • Stocks meta: _aioseop_keywords: Options, Stocks, Taleb, Black Swan, Trading, Writing Puts dsq_thread_id: '181043039' author:

    data.gifI've been thinking a lot about options this year and focusing my Internet searching on that topic a bit more than usual. I recently stumbled across a paper co-authored by Nassim Taleb, the author of the widely popular books "Black Swan" and "Fooled by Randomness". In this paper, he rails against the Black Scholes Merton Option pricing model and explains why it wasn't "invented" by the Nobel Prize winning researchers Black, Scholes, and Merton but rather "repackaged."

    The article also delves into the hidden risk of options and their pricing and I urge my readers to download the paper, its a fast read. It made me realize why traders like Victor Niederhoffer blow up when selling options, they rely on rational statistics applied to an irrational market. Most of the time selling options works well, and is very lucrative for traders and instituions. Its when the irrational market rears its ugly head and you get wild standard deviation moves in your assets, that the Black Scholes Merton's weaknesses are exposed; it can't adjust for financial outliers.

    The problem with those outliers is that you never know when they'll happen and most often the majority of traders and investors are exposed. So the future option trader question for today is to ask oneself, "what are the hidden risks in options and can a model be created to help better reflect those risks?"