Account
New to ADSS? Open an
account now to get started.
Already have an account?
Add funds to your ADSS account
Account
New to ADSS? Open an
account now to get started.
Add funds to your ADSS account
The Black Scholes model is a mathematical model used to price options contracts in financial markets. It is widely used by traders and investors to value options and to make trading decisions based on an option’s price and an asset’s implied volatility. It was developed in 1973 by Fischer Black and Myron Scholes, and the model works on the assumption that investors are rational and risk averse.
The Black Scholes model considers several factors. They include the underlying asset price, the option’s strike price, the time until the contract’s expiry date, the risk-free interest rate, and the implied volatility of the underlying asset. With these factors, the model calculates the theoretical value of the option. Traders can then compare this value to the option’s market price to determine whether it is overpriced or underpriced.
A trader believes that the stock price of a company will increase in the next four months. The stock is currently trading at $100. The trader decides to buy a call option on the stock with a strike price of $110 for a premium of $5 per share. Having purchased the call option, the trader has the right to buy the stock at the strike price of $110 anytime within the next four months.
The trader can use the Black Scholes model to calculate the fair value of the option. They take into consideration these factors: the current stock price is $100, the contract expires in four months, the volatility of the stock is 30%, and the risk-free interest rate is 2%, and the premium is $5 per share.
With the Black Scholes model, the trader discovers that the fair value of the option is $3.51 per share. If they believe that the option is overvalued, they may sell it and profit from the difference between the market price and the fair value calculated by the model. Conversely, if they believe the option is undervalued, they may purchase it in anticipation of the stock price appreciating.
ADSS offers a range of global markets for traders, with opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
ADSS
8th floor, CI Tower
Corniche Road
PO Box 93894
Abu Dhabi
United Arab Emirates
Trading Services
ts@adss.com
+971 2 657 2414
Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
