Heston Model
Categories: Financial Theory
Named after Mr. Steven Heston, the Heston model is a mathematical model that communicates the change of volatility of an underlying asset of an option.
The Heston model is a stochastic volatility model, which means that the model assumes the variance is randomly distributed, like the Black-Scholes model. Other models assume that the change in volatility of an underlying asset is deterministic, meaning we can literally “determine” what’s causing the volatility...if only we could put our mathy little fingers on it.
If you’re familiar with the Black-Scholes model and want to level up your options game, try out the Heston model. If you’re an options newb, you might want to give the Black-Scholes model a spin first. The Heston model is better for advanced investors, since it’s basically built off the back of the Black-Scholes.
Caveat Shmooptor: these things are dangerous to retail investors who don't really know what they're doing.