The Skinny on Options: Abstract Applications - September 13, 2021 - Infinite Variance

published 1 week ago by tastytrade, Inc.

While most models in the world of finance assume a finite variance, such as the Binomial Option Pricing Model and Black-Scholes Model, some models actually assume an infinite variance, such as the Stable Paretian Model. Given the unrealistic nature of an infinite variance, it might seem that this assumption is misplaced. But if we remember that stock prices are lognormally distributed with no bound on the upside, then it actually might make more sense to remove the cap on variance, too.

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