Previously in this column, we discussed whether a trader should apply the Black-Scholes-Merton (BSM) model to trade options. We showed that BSM model is useful when you want to understand the theoretical underpinnings about options. Once you gain trading experience, you will have an intuitive understanding of how to create strategies and how to adjust or repair your strategies when they incur losses. This week, we revisit the discussion about the BSM model. We discuss how you can incorporate options Greeks into your strategies without applying the BSM model.
Model benefits
Typical valuation models enable us to compare the output value with the actual price in the market. If the actual price is lower than the output value, then the asset is worth investing. But that argument does not hold water for options. The BSM model makes a lot of assumptions that do not hold in the real-world market.
So, the output value cannot be compared with the actual price to arrive at a meaningful decision. That said, the BSM model can be used by beginner-traders to understand how to choose strikes and how change in time, volatility and underlying price affect option prices. The sensitivity of the option price to these factors is captured by option Greeks – theta, vega, delta and gamma.
But how to incorporate option Greeks into your strategies without applying the BSM model? You must first determine the at-the-money (ATM) option. The ATM strike is the one immediately above the underlying price. This is in line with the BSM model according to which the ATM strike is the one which is equal to the forward price of the underlying at option expiry. The ATM strike is most sensitive to factors that affect an option price.
This is because a change in the underlying price can make the ATM strike either in-the-money (ITM) or out-of-the-money (OTM). When a strike moves from ATM to ITM, it will generate handsome gains, as the ITM strikes also carry intrinsic value. That means the change in delta (captured by the gamma) is the highest for an ATM strike. The flip side is that the ATM strike also carries the highest time value and is also most sensitive to changes in volatility. That means the ATM strike will lose the most time value (time decay) with each passing day. It is the trade-off between time decay and delta gains that determines the trading gains when closing a position.
Optional reading
If you were to trade options and prefer to go long, then choosing the ATM strike would be meaningful. Whether you want to initiate a plain-vanilla long position, or a spread depends on whether you have identified resistance (support) level for the underlying while setting up call spreads (put spreads). The above discussion alludes to an important point: you can trade options without applying the BSM model to create your strategies, but your reading of price charts is important.
(The author offers training programs for individuals to manage their personal investments)
Published on May 23, 2026
