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Price of Options

 

Options are priced according to supply and demand, but there are theoretical calculation mechanisms that can help a trader determine the "fair" value of an option. These calculations are generally extensive and are performed with the aid of software (that is just a part of what we do here at Option Systems). The following factors are incorporated in the calculation models:

  • The current price of the underlying stock

  • The date on which calculations are performed

  • The strike price of the option

  • Interest rates

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  • Volatility

  • Option duration (when it expires)

  • Dividends (if applicable)

Although it is useful and important to know the fair value of an option, it is not the sole determining factor in buying or selling options at certain values. A trader should be aware of the difference between the option price and the fair price, but the bid and ask prices on trading day are much more significant in decision making.

 

 

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