## Explaining Options Markets

Pricing options for equities use the Black-Scholes method. The mathematical formula was developed in the late 1960s. Unless you were a math major, the formula is complex and won't be repeated here. The formula uses the stock price, the exercise price, the interest rate, the standard deviation of the change in the stock price, and the time to maturity to determine the option price. Implied volatility is an important concept in the pricing of options. Implied volatility is a function of an option's price and is backed out from the price. Implied volatility shows the expectation of future volatility. Volatility is a one-standard-deviation annual figure.…