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The Black-Scholes Model: Probability Density Functions (Part Two)

From Theory To Practice

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Today, we continue our discussion on the Probability Density Functions that we find ‘hidden’ within the Black-Scholes Model. What we learn is that these functions effectively work to establish the probabilities that are associated with the options moving in-the-money or out-of-the-money. Frank joins the discussion again to remind us that there are cumulative density functions, standard normal variables, and z-scores, all working behind the scenes to determine these outputs.

You can watch every part of the Black-Scholes series below:

Part One: Pricing a Call

Part Two: Pricing a Put

Part Three: Probability Density Functions: Part One

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