What Is the Black-Scholes Model’s Primary Use in Valuing Options?

The Black-Scholes model is a mathematical model used to estimate the theoretical fair price (premium) of European-style options. It calculates this price based on five key inputs: the underlying asset's price, the strike price, the time to expiration, the risk-free interest rate, and the underlying asset's volatility.

Its primary use is to provide a benchmark for pricing and to derive the implied volatility of traded options.