How Black Scholes Precipitated the 1987 Black Monday Financial Crash

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This is the second of a three-part series. Today, you will learn about how abusing a Nobel Prize-winning formula, paired with the rise of electronic trading, led to a $1.7 trillion global-market crash on the dawn of October 19th, 1987…

The Black Scholes model was revered due to its immense power, yet being remarkably simplistic. It was a simple formula that could calculate the theoretical price of an option at any moment in time by just knowing the current stock price.

Although options contracts were being traded as far back as the Ancient Greeks, there never was a way to calculate its value! Writers of these contracts had to essentially ballpark its value based on rough mathematics and experience. 

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