Options Pricing: Modeling
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  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-Rubenstein 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

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 up-to-the-minute 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.

Basic options calculator
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 Black-Scholes model (for European options).
Options Pricing: Black-Scholes Model

  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-Rubenstein 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
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