The Dial Nobody Can See - Black-Scholes and implied volatility

The price of a right to buy water in a drought, and what happens to it as the weather gets wilder. This lesson explains why the price moves with that one dial, and why nobody can read the dial directly.

Before you start. From A Price With No Opinion in It - no-arbitrage, replication and the binomial tree: an option’s price is forced by copying it with the underlying thing and a loan, and a binomial tree with more and more steps lands on one number, the 1973 formula. From A Day That Should Never Have Happened - volatility, the bell curve and fat tails: volatility is how widely returns swing, usually quoted as a percentage a year, and real markets have more extreme days than a bell curve allows.