Making the Most of Options Pricing Theory and Strategies

Making the most of options pricing theory and strategies help when investing

Making the most of options pricing theory and strategies can help you determine the most beneficial model to assist you with your investments. Option pricing strategies can be defined as models used to determine the option’s fair value.

The binomial model and the Black-Scholes model are two widely used option pricing strategies that have wide error margins, because their values are calculated from other assets, such as a business’ common stock prices. Consider the following tips on making the most of options pricing theory and strategies.

1. Assess the primary drivers of option pricing.

2. Compare commonly used option pricing strategies.

3. Consult with an options broker to assist you in making the most of options pricing theory and strategies.

Evaluate factors affecting option pricing

To fully understand and make the most of options pricing theory and strategies, you must first learn about the primary factors that affect the price of an option. These factors include the current stock price, volatility of the market, intrinsic value and the time left before an option expires. The current stock price is directly related to options pricing. As the stock price increases, the more likely the option price will decrease and vice versa.
Foster College of Business at Bradley University to learn more about making the most of options pricing strategies. You can also find more information about option pricing strategies by checking out the Options FAQ from The Options Industry Council.

Learn about the advantages of various option pricing strategies

When compared to other option pricing strategies, the binomial model is mathematically simple and somewhat easy to create and implement using computer spreadsheets. This option pricing strategy, created in 1979, also reduces the possibility of price changes and makes the assumption that the market is efficient. The Black-Scholes model, created in 1973, has become a key options pricing theory in today's financial market. This model is widely recognized as one of the most practical ways to calculate the fair value of options.

Seek professional advice on stock option valuation

Conducting research is a great way to familiarize yourself with the common terms and methods to determine option pricing, but to fully make the most of the option pricing strategies, you may consider seeking advice from options brokers. They can help you learn when to use which option pricing theory to accurately determine the fair value when trading options. They can also provide insight on your investments.
  • Stock option valuation has become a hot topic in recent years because U.S. businesses are required to now record the cost of employee stock options as an expense on their earnings statements. Expect the creation of innovative options strategies to help traders accurately and consistently address this increased expense.