Model Assumptions

Model assumptions are the foundational premises that mathematical formulas, like Black-Scholes, rely on to function. These include assumptions about market efficiency, constant volatility, no transaction costs, and continuous trading.

In the real world, and especially in crypto, these assumptions are often violated. Markets are not perfectly efficient, volatility changes constantly, and transaction costs are significant.

Professional traders must account for these deviations by adjusting their inputs or using more complex models that relax these constraints. Understanding these assumptions is what separates a novice from an expert, as it allows the trader to recognize when the model's output might be misleading or inaccurate due to the current market environment.