Course Name: Options Volatility Trading: Concepts and Strategies, Section No: 19, Unit No: 14, Unit type: Notebook
In this Jupyter Notebook "Monte Carlos Simulator for Long Strangles", in my opinion there is an error in the function "long_strangle". It's using S0 (initial underlying price) in the quantification of call,put prices using BSM (inside equation) instead of using St (which is the price obtained in GBM). So, it should be replaced by St. Correct?
Hello Jorge,
In the "Monte Carlo Simulator for Long Strangles" Jupyter Notebook, the use of the initial underlying price (So) instead of the terminal price (St) in the Black-Scholes-Merton (BSM) calculations within the long_strangle function is correct.
The Black-Scholes-Merton model assumes that option prices are calculated at the present time based on the current stock price. Therefore, using So in the BSM calculations aligns with the model's assumptions and is appropriate for pricing options at the initial time.
In the context of the Monte Carlo simulation, the function is designed to generate a simulated terminal price (St), and the subsequent BSM calculations use So as intended to determine option prices at the initial time. This approach is consistent with the principles of the Black-Scholes-Merton model and ensures accurate pricing within the context of the simulation.
I hope this clearifies your doubt!