What the Black-Scholes formula prices — European call and put options

How does the Black-Scholes formula for pricing European call and put options incorporate the concepts of stochastic volatility and risk-neutral valuation? support: The Black-Scholes formula incorporates stochastic volatility by assuming that the volatility of the underlying

is a random process, and risk-neutral valuation through the use of a risk-free interest rate and a discount factor

What the Black-Scholes assumptions are — constant volatility, no dividends, log-normal prices, no transaction costs

Black-Scholes assumes constant volatility, no dividends, log-normal price distribution, and no transaction costs

What put-call parity states: C - P = S - K·e^(-rT)

Put-call parity: Difference between call and put prices equals stock price minus strike times discounted interest rate

How does the binomial option pricing model calculate the price of American options compared to European options?

American options use a binomial tree with early exercise option, while European options do not

How does implied volatility decay affect the pricing of exotic options, particularly as the expiration date approaches?

Implied volatility decay increases the value of long-dated exotic options as expiration nears

What theta decay does to options — time value erodes faster as expiration approaches

Theta decay accelerates as expiration nears, diminishing options' time value