How can stocks are squeezed in the Black–Scholes framework

How can stocks are squeezed in the Black–Scholes framework when it falls dramatically?

E

Expert

##### Verified

Easily, just bump up the implied volatilities for option along with lower strikes. A low strike put option will be out of the money till the stock falls, at that point this may be at the money and at similar time volatility might raise. Therefore, bump up the volatility of all of the out-of-the-money puts. It deviation from the flat-volatility Black–Scholes world tends to determine more pronounced closer to expiration.

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