Black Scholes Formula: Inputs Guidance

It would be easier to explain the inputs with an example. So let's assume, we want to price a 2-year maturity, 2,500 strike call option on a non-divided paying stock, which has a current price of 2,500, and implied volatility of 30% (0.30). Let the risk free discount rate be 5%(0.05). Then the inputs will be entered as follows:

Stock Price 2,500.00
Strike Price 2,500.00
Volatility 0.30
Discount Rate 0.05
Dividend Yield 0.0
Maturity (years) 2.0
Option Type Call

The above shows that the inputs are relatively straightforward. A few things that might cause some confusion are:

  • The time to maturity is in years, so a maturity of 15 months will be inputted as 1.25 (=1.0+3/12).
  • The volatility, discount rate, and dividend yield are not formated with %, e.g., 5% is entered as 0.05.
  • Finally, the stock price, strike price, volatility, and maturity should be non-negative. If any of these is negative, it will be replaced with zero.