Black-Scholes is rarely used to actually price options. It's most commonly used to back out what the current implied volatility is.

Things like Black-Scholes (using past volatility of the underlying to model the probability distribution in the future) are often used by market makers to price options, but the vanilla version never is.

Any market maker pricing options with Black-Scholes won't be a market maker for long.

Black-Scholes is just a customer-facing description of the option (i.e, it provides greeks that everyone can understand). But it isn't used as a starting point.

In practice, MM will back out what the implied volatility is from current prices. Then a stochastic volatility model is calibrated against that.

https://en.wikipedia.org/wiki/Stochastic_volatility

No - no market maker is using stochastic volatility. (L)SV is only used for exotics. Market makers use a tricked out Black Scholes where the 'secret sauce' is in how you apply the chain rule when you calculate the greeks.

Would be curious to know more about this.

But why would they refuse to? They're there to make money too, after all.

Maybe they have buddies at SEBI who can freeze their counterparty's assets and return the half-billion dollars they lost back to them.

That's not really how it works, the market making firms would essentially have to update their vol curves in response to that signal (BS being essentially just a coordinate change from price to volatility).

> and refused to update their prior when they lost money day after day

The market takes money from people with incorrect beliefs about economics and gives it to people with correct beliefs. ~~What is the problem here?~~

On second read, I think the parent was just intending a factual statement, which I am willing to agree with.

The market takes money like a bully most of the time. Any other belief is as theoretical as communism vs practice.

If you're selling millions of dollars of options you're taking an extremely willing risk, not getting bullied.

Edit: Reading more about this, it looks like the counterparty is often a bunch of retail investors doing quick trades hoping the stock swings one way or the other, and that's not bullying that's gambling.

I agree with your edited point, and in response to sentiments I saw earlier in the thread—even gamblers deserve nominal assurances against cheating. My two cents, which I personally will be investing in wishes via my local wishing well, to which I’ve connected a dedicated fiber link to power my high-frequency algorithmic wish arbitrage desk.

Disassociates the value of the underlying assets which devalues the currency. Probably why regulatory bodies had to get involved.

it's not the 90s anymore

Black-Scholes takes a couple of parameters. To get hold of them, in particular volatility, requires you to look at what the markets have been doing.