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The Skinny On Options Math

Log Normal Distribution

The Skinny On Options Math

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

The Black-Scholes model for pricing options uses a log normal distribution for the price of securities, not a normal standard distribution. While this may not seem correct, there is a good explanation for it. That is, the price of a security can not go below 0.

Today, Tom Sosnoff and Tony Battista are joined by Jacob Perlman as he explains why the Black-Scholes model uses the inputs that it does. Jacob discuss all of the math around why using a log normal distribution makes more sense than using standard deviations and he covers the difference between the two!

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