[tdees40]

This is a pretty silly piece.

First of all, the vast majority of LTCM's trades had nothing at all to do with the Black-Scholes-Merton formula (BSM). They were just highly levered mean reversion trades. The fall of LTCM had nothing to do with the BSM formula, it had everything to do with leverage.

Secondly, vanilla BSM with constant volatility isn't really used to do anything important anymore. It was going away much earlier than 1997 anyway; the Heston model came around in 1993, and Derman was using a primitive version of local vol around the same time. And of course people knew that financial asset returns were not normally distributed with constant vol (Mandelbrot wrote a paper describing that in 1963!).

I won't even get into why his (and Salmon's) description of how the Li formula was used is completely wrong.