Showing posts with the label option-premium-example

Option Premiums- Introduction

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


THE OPTIONS COURSE CONCLUSION Options, the most flexible financial instrument that exists today, provide  unique investment opportunities to knowledgeable traders on a regular  basis. However, the entire options arena can be a very complex and con fusing place in which to venture, especially for the novice trader. The pri mary reason for this complexity is the fact that options trading is a  multidimensional process; and each dimension needs to be understood in  order to trade successfully. Prior to initiating an options position, there are three main issues to  consider: direction, duration, and magnitude. Direction refers to whether  the underlying security will move up, down, or sideways. Duration refers to  how long it will take for the anticipated move to take place. Magnitude  refers to how big the subsequent move will be. In order to make a profit, the  options trader must be correct in all three of these categories. This is the  primary reason that many people