THE ASSET’S PRICE

At the core, the price of the underlying asset is important in options pricing. It’s what everything is based off of, and it’s the price of the asset. It is what will determine the put and call options as well, and it’s what you will be looking at to invest Read more…

OPTION VOLATILITY

Volatility is one of the elements in option pricing. Generally, stable stocks have lower option prices than the extremely volatile stocks. If lots of people start investing in a specific stock, its price will increase. The market maker can control the volatility by increasing the option premium. As a versatile Read more…

THEORETICAL VALUE OF OPTIONS

A theoretical value is generated through an option pricing model. Every element has a certain value and forms part of the theoretical value at a future time. If the stock is chosen as the underlying asset, security or commodity, its theoretical value includes implied volatility on the basis of the Read more…

THE BLACK-SCHOLES MODEL

In 1973, Robert Merton, Myron Scholes, and Fischer Black introduced the Black-Scholes pricing model as a way of computing option premium. Since then, this model has become the most popular. In fact, Merton and Scholes received a Nobel Prize in Economics two years after Black died in 1995. Black, however, Read more…

BINOMIAL OPTION PRICING MODEL

A variation of the Black-Scholes model, the Cox-Ross-Rubenstein model was developed by Mark Edward Rubenstein, Stephen Ross, and Carrington Cox. The primary advantage of this model is that it uses a lattice-based model and takes into consideration the price movement of the underlying asset over time. A lattice-based model considers Read more…

PUT-CALL PARITY

As a pricing concept, the put/call parity was presented by Hans Stoll in 1969. According to his study, there is a relationship between the European call and put options with similar strike price and expiration date. It means that, for every call option value at a particular strike price, there’s Read more…