David:
Is there is a straightforward "English language" interpretation for the BSM-related probabilities N(d1) and N(d2) -- for example, since N(d1) seems to be "linked" to S (current stock price) and N(d2) to the PV of the strike price, is there a simple way to understand the meaning of N(d1) and N(d2) -- I am wondering if N(d1) means the probability of the stock price at option expiration exceeding the strike price and N(d2) -- the prob. of the stock price at expiration being below the strike price.
To be honest, I am just graspig at straws here...But from the BSM equation -- S * N(d1) and PV(K) * N(d2) seems to smell (respectively) like the expected value of S and expected value of PV(K) -- but I am struggling to connect the dots.
Since the call option payoff is max (0, S-t - K) [S-t being stock at time T the time of expiration]
I see the symmetry between this and the call option price in the BSM equation...I will stop rambling now.
Summary: What is the English interpretation of N(d1) and N(d2)? Since the delta of a long call option is N(d1), there must be some generic interpretation....I must have missed it.
--sridhar
Is there is a straightforward "English language" interpretation for the BSM-related probabilities N(d1) and N(d2) -- for example, since N(d1) seems to be "linked" to S (current stock price) and N(d2) to the PV of the strike price, is there a simple way to understand the meaning of N(d1) and N(d2) -- I am wondering if N(d1) means the probability of the stock price at option expiration exceeding the strike price and N(d2) -- the prob. of the stock price at expiration being below the strike price.
To be honest, I am just graspig at straws here...But from the BSM equation -- S * N(d1) and PV(K) * N(d2) seems to smell (respectively) like the expected value of S and expected value of PV(K) -- but I am struggling to connect the dots.
Since the call option payoff is max (0, S-t - K) [S-t being stock at time T the time of expiration]
I see the symmetry between this and the call option price in the BSM equation...I will stop rambling now.
Summary: What is the English interpretation of N(d1) and N(d2)? Since the delta of a long call option is N(d1), there must be some generic interpretation....I must have missed it.
--sridhar