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 and days till expiration – along with forecasts (or assumptions) for factors like implied volatility, to compute the theoretical value for a specific option at a certain point in time. Variables will fluctuate over the life of the option, and the option position's theoretical value will adapt to reflect these changes.
Most professional traders and investors who trade significant option positions rely on theoretical value updates to monitor the changing risk and value of option positions and to assist with trading decisions. Many options trading platforms provide uptotheminute option price modeling values, and option pricing calculators can be found online at various Web sites, including the Options Industry Council (http://www.optioneducation.net/calculator/main_calculator.asp). This particular calculator allows users to select by model/exercise type, as shown in Figure 3.
Figure 3 The options calculator found on the Options Industry Council Web site allows users to choose either a Binomial model (for American style options) or the BlackScholes model (for European options). 

Implied Volatility  IV
The estimated volatility of a security's price. 
Exotic Option
An option that differs from common American or European options ... 
Lookback Option
An exotic option that allows investors to "look back" at the ... 
LatticeBased Model
An option pricing model that involves the construction of a binomial ... 
Option Pricing Theory
Any model or theorybased approach for calculating the fair ... 
Option
A financial derivative that represents a contract sold by one ...

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