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Option Premiums- Introduction

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Option Premiums Introduction As important as knowing the chances of a LEAP put winding up in the money is  knowing whether the option in question is over- or underpriced. When it comes to long- term options, market makers use one of several analytic formulas to calculate option  prices. This is because the computational complexity associated with multiperiod  binomial models increases dramatically with the number of steps involved, thus  restricting their applicability to standard, short-term option pricing. Depending on the sophistication of the market maker, option pricing is typically  determined either by straightforward use of the original pricing formula developed by  Fischer Black and Myron Scholes in 1973 or by the use of later extensions of this  formula by Robert Merton, Giovanni Barone-Adesi, and Robert Whaley.  In a nutshell,  the Black-Scholes model determines option prices for European-style options , ignoring the effects of dividends. The  Merton mod