Black Scholes Framework

The Black Scholes framework is the foundational mathematical model for pricing European options, published in 1973. It assumes that the underlying asset price follows a geometric Brownian motion and that volatility and interest rates are constant over the life of the option.

The model outputs a theoretical value and the associated Greeks, which allow for systematic hedging. While it is widely used, it has limitations, particularly in markets with fat tails or non-constant volatility, which are common in crypto.

Practitioners often use the framework as a starting point, applying adjustments or using more complex models to better reflect real-world conditions. It remains the industry standard for understanding the relationship between option prices and their underlying drivers.