Application of the Nobel-Prize-Winning Black-Scholes Option Pricing Formula in a Day Trading Setting
“We can’t let you leave MIT without understanding a little bit about the basics of option pricing,” Professor Andrew Lo talked to the students in his 15.401 Finance Theory class at MIT (https://www.youtube.com/watch?v=rMsu4v-UlkA). Although I’m not yet an MIT student, this statement gave me an intuition that option pricing must be extremely important. Since finance people as elite as the MIT graduates all know about the option pricing, I probably should do so as well. The Black-Scholes formula is the heart of option pricing and is regarded as beautiful as other famous formulas such as Isaac Newton’s F=ma and Albert Einstein’s E=mc2. In fact, I did not appreciate the beauty of the Black-Scholes option pricing formula until I finished Professor Lo’s course, read the stories about how the formula was developed, extrapolated the idea of the formula to day trading, and found a lot of success in that the formula could give me so valuable information about the stock market, which I would otherwise have no way to see. In this article, I’m going to share my understanding of the formula and how I employ it as an early indicator of stock price changes in solving the chart pattern puzzles of day trading every morning at 9:30 am. A little advice before you start reading this article: do not let a formula be a…
