Option Pricing Model



An option pricing model is a magnificent "number crunching" trading tool. Without it, we are trading blind by the seat-of-our-pants. It is the difference between "knowing" and "guessing". It would be like a pilot flying without instruments.

It instantly computes implied volatilities, over/under evaluations, finds "best" trades based upon various scenarios, estimated outcomes, both "on-the-fly" and at expiration, and all that good stuff.

A theoretical pricing model gives us an "edge" against those who trade without one and "levels the playing field" against those that do.

If we had to do the calculations ourselves (good luck with that), the market would close before we'd get anything done.

But here's the thing: It's all THEORETICAL! It's not real. It's all guess work.

Forecasts are based on assumptions, which are nothing but educated guesses, and guesses are very "iffy" things.

There's nothing wrong with using a theoretical model in forecasting, per se, as long as we realize that we're never going to be right. We're always going to be wrong.

We strive for perfection in an imperfect world. Sorry to have to be the one to tell you.

All our sophisticated "toys" allow us to do is find out what kind of guessers we are.

It's all well and good to use an option pricing model, or any tool for that matter, to try to pierce through the "fog" of the future before we actually commit to a position.

However, once we commit it is no longer theoretical. It's REAL!

From that point forward, the only thing that matters is price. Theory is out the window.

Have your targets, stop-loss points, and follow-up actions figured out in advance and stick to them. A good option pricing model program can help us with that also.

Once a trade is established, manage the trade to its conclusion. Then move on to the next trade. It's as simple as that.

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