Black Scholes Option Pricing Formula Explained

Continunig further from our part I of this article, Black–Scholes Model Explained with Example for Options Pricing, we discussed the following three points:

1. the probability that Microsoft stock will actually move higher than $25
2. the probability that if it moves higher, how high will it go?
3. the time value of money for the one year timeframe (time to option expiry)

Let's see the second part here, for the third point of time value of money.

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Black–Scholes Model Explained with Example for Options Pricing

Black–Scholes Model which was developed by Fischer Black, Myron Scholes and Robert Merton in the early 1970’s is widely used in pricing Options. However, how many of the actual options traders really understand the Black–Scholes Model is a big question.
In this article, we'll cover layman's approach to understanding the logic and reasoning behind the Black–Scholes Options Model. We also cover the underlying assumptions for Black–Scholes Model and see how the same model can be extended to price different financial assets.

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