Does the Black-Scholes Model Account for the Bid-Offer Spread? ▴ Learn

Does the Black-Scholes Model Account for the Bid-Offer Spread?

The basic Black-Scholes-Merton (BSM) model does not directly account for the bid-offer spread. It is a theoretical pricing model that outputs a single fair value for the option, assuming a frictionless market with no transaction costs.

Traders and market makers then apply the BSM value as a mid-point reference, adjusting the bid and ask prices around it to incorporate transaction costs, risk, and the spread.

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