1. Options Pricing: Introduction
  2. Options Pricing: A Review Of Basic Terms
  3. Options Pricing: The Basics Of Pricing
  4. Options Pricing: Intrinsic Value And Time Value
  5. Options Pricing: Factors That Influence Option Price
  6. Options Pricing: Distinguishing Between Option Premiums And Theoretical Value
  7. Options Pricing: Modeling
  8. Options Pricing: Black-Scholes Model
  9. Options Pricing: Cox-Rubinstein Binomial Option Pricing Model
  10. Options Pricing: Put/Call Parity
  11. Options Pricing: Profit And Loss Diagrams
  12. Options Pricing: The Greeks
  13. Options Pricing: Conclusion

Option traders use various option pricing models to calculate theoretical option values. These mathematical models use certain fixed knowns in the present – things like underlying price, strike price and days until expiration – along with forecasts (or assumptions) for factors such as implied volatility, to compute the theoretical value for specific options at certain points in time. Variables fluctuate over the life of the option, and the option's theoretical value adapts to reflect these changes.

Most professional traders and investors who trade large option positions rely on theoretical value updates to monitor the changing risk and value of their option positions, and assist with trading decisions. Many options trading platforms provide up-to-the-minute option price modeling values, and option pricing calculators can be found online at various websites, including the Options Industry Council. The basic calculator shown in Figure 3 lets you choose the model/exercise type, and then prompts you to enter various fields, including the contract type, spot price of the underlying, expiration date, interest rate, dividend amount (if applicable) and strike price.

Basic options calculator
Figure 3 The options calculator from the Options Industry Council lets you choose either a Binomial model (for American style options) or the Black-Scholes model (for European options).

Options Pricing: Black-Scholes Model
Related Articles
  1. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  2. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  3. Trading

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  4. Trading

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
  5. Trading

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
  6. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
Frequently Asked Questions
  1. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  2. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
  3. How does inflation affect the exchange rate between two nations?

    Inflation is closely related to interest rates, which can influence exchange rates. Countries attempt to balance interest ...
  4. What are some examples of free market economies?

    In a free market economy, the law of supply and demand, rather than a central government, regulates production and labor. ...
Trading Center