Today, on this segment of "The Skinny On Options Modeling", Tom Sosnoff, Tony Battista and Tom Preston delve into the Black-Scholes options pricing model to explain why we multiply volatility by the square root of time. Despite the calculations shown on some of the slides one does not need to be a math genius to learn a lot from this segment.
Tom Preston revealed that there are two goals to this segment. The first is to explain the mechanics of why we take the square root when dealing with volatility. The second is to learn whether it matters if we use calendar days or trading days when doing a one day trade. Ultimately, this segment will make things simpler for you.
A theoretical example of an asset's volatility is examined. It is explained why using volatility by itself won't work and the solution is explained. Earlier, on today's episode of "Market Measures", the point was made that there is a large difference between a binary event with one day to go versus one with more than a month. Here we learn why that is true and can see it mathematically.
Tom Preston explains how variance and time are converted by the square root. Tony reminds everyone of a ditty that Tom Preston introduced a year ago to explain some of these concepts.
Watch this segment of "The Skinny on Options Modeling" with Tom Sosnoff, Tony Battista and Tom Preston to better understand some important concepts and the logic of selling premium.
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