Black-Scholes
A mathematical model used to calculate the theoretical fair price of European-style options.
Explanation
Developed by Fischer Black, Myron Scholes, and Robert Merton in 1973, this model takes into account the underlying price, strike price, time to expiration, risk-free interest rate, and implied volatility. While it assumes constant volatility and no dividends (in its basic form), it remains the foundation of modern options pricing.
Example
Using Black-Scholes with S=$100, K=$100, T=30 days, r=5%, IV=20% yields a call price of approximately $2.52.