# What does the price of an option mean?

Definition. The amount per share that an

**option**buyer pays to the seller. The**option**premium is primarily affected by the difference between the stock**price**and the strike**price**, the time remaining for the**option**to be exercised, and the volatility of the underlying stock.A.

### What is the option pricing theory?

An

**option pricing theory**is any**model**or**theory**-based approach for calculating the fair value of an**option**. Today, the most commonly used models are the Black-Scholes**model**and the binomial**model**.#### What is Black Scholes option pricing model?

The**Black Scholes model**, also known as the**Black**-**Scholes**-Merton**model**, is a**model**of**price**variation over time of financial instruments such as stocks that can, among other things, be used to determine the**price**of a European call**option**.#### What is the binomial model?

The**binomial**option pricing**model**is an options valuation method developed in 1979. The**binomial**option pricing**model**uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the option's expiration date.#### What is the binomial theorem formula?

The**Binomial Theorem**is a quick way (okay, it's a less slow way) of expanding (or multiplying out) a**binomial**expression that has been raised to some (generally inconveniently large) power. For instance, the expression (3x – 2)^{10}would be very painful to multiply out by hand.

B.

### What is the Black Scholes option pricing model?

The formula, developed by three economists – Fischer

**Black**, Myron**Scholes**and Robert Merton – is perhaps the world's most well-known**options pricing model**. The**Black**-**Scholes model**makes certain assumptions: The**option**is European and can only be exercised at expiration.#### How do dividends affect stock options?

Cash**dividends affect option**prices through their**effect**on the underlying stock price. Because the stock price is expected to drop by the amount of the**dividend**on the ex-**dividend**date, high cash**dividends**imply lower call premiums and higher put premiums.#### What is implied volatility?

Historical**volatility**is the annualized standard deviation of past stock price movements. It measures the daily price changes in the stock over the past year. In contrast,**implied volatility**(IV) is derived from an option's price and shows what the market implies about the stock's**volatility**in the future.#### What is a delta hedge?

**Delta hedging**is an options strategy that aims to reduce, or**hedge**, the risk associated with price movements in the underlying asset, by offsetting long and short positions. For example, a long call position may be**delta hedged**by shorting the underlying stock.

C.

### What is the price of the option?

**Option pricing**refers to the amount per share at which an

**option**is traded.

**Options**are derivative contracts that give the holder (the "buyer") the right, but not the obligation, to buy or sell the underlying instrument at an agreed-upon

**price**on or before a specified future date.

#### How is the value of an option determined?

The overall value of an**option**is actually**determined**by six factors: strike**price**, current market**price**of underlying stock, dividend yield, prime interest rate, proximity to expiration date, and the volatility of the stock**prices**over the course of the**option**.#### What is the price of a call option?

**Call options**give the holder the right to buy 100 shares of an underlying stock at a specific**price**, known as the strike**price**, up until a specified date, known as the expiration date. The market**price**of the**call option**is called the premium. It is the**price**paid for the rights that the**call option**provides.#### What is the price of a call?

A**call price**is the**price**at which a bond or a preferred stock can be redeemed by the issuer. This**price**is set at the time the security is issued. Also referred to as "redemption**price**."

Updated: 9th October 2018