The Skinny on Options: Abstract Applications

Negative Drift?

The Skinny on Options: Abstract Applications

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

Under normal circumstances, the Geometric Brownian Motion model shows us that the markets are assumed to drift higher over time. This makes sense from a risky asset and risk premium standpoint. However, if we dig a little deeper into the Black Scholes model, we see that if the relative relationship between interest rates and implied volatility gets lopsided in favor of higher volatility, then we could be in a market that is actually subject to a negative drift.

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