Today, on this segment of "The Skinny On Options Math" Tom Sosnoff, Tony Battista and our math genius Jacob Perlman discuss the SABR pricing model (a variation of Black-Scholes). As Tom says, the more you understand options the more you can trade them with confidence.
Tom began the discussion by giving a brief explanation of how supply and demand changes market prices. Jacob replied that the purpose of the SABR pricing model was to indicate whether or not the market price was correct or too high or too low.
SABR is an acronym for Stochastic, Alpha, Beta and Rho. It expands on Black-Scholes by including three parameters, beta, rho and nu which describe the evolution of both the underlying price and its volatility (which can have values chosen to create IV smiles). The SABR model says that the price of forward evolves according to an equation that Jacob explains and notes how it differs from Black-Scholes.
Jacob tells us that SABR is relatively new (less than 10 years) and cautions us that some have written articles on SABR use notations that differ from those of the original author. The ultimate goal of SABR is to improve on Black-Scholes concerning volatility smile and skew.
Watch this segment of "The Skinny On Options Math" with Tom Sosnoff, Tony Battista and Jacob Perlman for a discussion of the SABR pricing model and how it differs from Black-Scholes.