DEFINITION of 'Option Pricing Theory'
Any model or theorybased approach for calculating the fair value of an option.
The most commonly used models today are the BlackScholes model and the binomial model. Both theories on options pricing have wide margins for error because their values are derived from other assets, usually the price of a company's common stock. Time also plays a large role in option pricing theory, because calculations involve time periods of several years and more. Marketable options require different valuation methods than nonmarketable ones, such as those given to company employees.
BREAKING DOWN 'Option Pricing Theory'
How stock options should be valued has become an important debate in the past few years because U.S. companies are now required to expense the cost of employee stock options on their earnings statements. For many young companies trading on the stock exchanges today, this expense will be considerable no matter what valuation methods are used. The need for consistent and accurate treatment of this increasing expense provides incentive for the creation of new and innovative solutions to option pricing theory.

Binomial Option Pricing Model
An options valuation method developed by Cox, et al, in 1979. ... 
LatticeBased Model
An option pricing model that involves the construction of a binomial ... 
Black's Model
A variation of the popular BlackScholes options pricing model ... 
Down Transition Probability
The probability that an asset's value will decline in one period's ... 
Trinomial Option Pricing Model
An option pricing model incorporating three possible values that ... 
Black Scholes Model
A model of price variation over time of financial instruments ...

Options & Futures
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Options & Futures
How To Build Valuation Models Like BlackScholes (BS)?
Want to build a model like BlackScholes? Here are the tips and guidelines for developing a framework with the example of the BlackScholes model. 
Options & Futures
Options Pricing: Modeling
Option traders utilize various option price models to attempt to set a current theoretical value. Models use certain fixed knowns in the present – factors such as underlying price, strike ... 
Options & Futures
Should Employees Be Compensated With Stock Options?
Learn the good, the bad and the ugly sides of this type of payout. 
Fundamental Analysis
Examples To Understand The Binomial Option Pricing Model
Binomial option pricing model, based on risk neutral valuation, offers a unique alternative to BlackScholes. Here are detailed examples with calculations using Binomial model and explanation ... 
Options & Futures
The Controversy Over Option Expensing
There has been much debate over whether companies should treat employee stocks options as an expense. This article examines both sides of the argument. 
Options & Futures
The Benefits And Value Of Stock Options
The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options. 
Stock Analysis
Our View on Stock Options
In this piece, David Harper wades deep into the option expensing ruling and what this really means to investors. 
Options & Futures
Stock Options: What's Price Got To Do With It?
A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price. 
Options & Futures
Understanding Option Pricing
Take advantage of stock movements by getting to know these derivatives.

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