How Options Are Priced
Options trading can often be complex, but understanding how these financial instruments are priced is crucial for anyone diving into this market. Options derive their value from an underlying asset, typically a stock, and their price, known as the premium, is influenced by factors ranging from the present share price to the time left until expiration of the option.
Two primary models have emerged as the go-to tools for pricing options: the Black-Scholes and binomial models. While these mathematical formulas can look intimidating, their purpose is simple—to help traders determine fair market value for options contracts. We’ll go through some of the math below, and everyone, even the most math-phobic, can follow along to gain key…
