and the prize for genius goes to McArabian

The formula in my last post was the first line in working out the Black-Scholes Equation.

McArabian replied that it was the Ito formula, so my first thought was good try but wrong answer. But then I did a little research and found out that Black-Scholes used Ito as its basis.

You might be all falling asleep now, so let me tell you what Black-Scholes is and how you can make mountains of money with it.

The definition below is oversimplified so that I don't get into a boring discourse.

Black Scholes is the model for stock options. Options are financial derivatives that let you own a stock without paying the full price, so instead of buying google (GOOG) at its current price of around $300, you could a google option at $18 and if google rises by $20 (which it could easily do) you end up doubling your money. Double your money a few times and you end with millions.

Of course, there is no such thing as easy money. What black scholes does is tell you what is the proper price for an option, to really understand options you need to understand black scholes. Sometimes option prices go out of sync and when you detect that, you strike and make your money. Major banks and investment houses have powerful computer hardware simulating black scholes again and again and comparing it against current prices, as soon as they detect any misalignment they send out automatic transactions, closing the day with a few millions in their accounts.

Ok, if you want to learn more, google black scholes, my few modest lines are not enough, there are whole books about this.