# 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.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**.#### Is a binomial distribution normal?

A**binomial distribution**is very different from a**normal distribution**, and yet if the sample size is large enough, the shapes will be quite similar. The key difference is that a**binomial distribution**is discrete, not continuous. In other words, it is NOT possible to find a data value between any two data values.#### 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.#### What is a Trinomial and give an example?

noun. The definition of a**trinomial**is a math equation that has three terms which are connected by plus or minus notations. An**example**of**trinomial**is 6x squared + 3x + 5.**Trinomial**means the scientific name of a plant. An**example**of a**trinomial**is a name which inclues the genus, species and the variety.

B.

### 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 options are taxed?

The bargain element of a non-qualified stock**option**is considered "compensation" and is**taxed**at ordinary income**tax**rates. If the employee decides to sell the shares a year after the exercise, the sale will be reported as a long-term capital gain (or loss) and the**tax**will be reduced.#### What is the premium of an option?

An**option premium**is the income received by an investor who sells or "writes" an**option**contract to another party. For stock**options**, the**premium**is quoted as a dollar amount per share, and most contracts represent the commitment of 100 shares.#### 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.

C.

### 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.#### Why would you buy a put option?

To review,**buying**a**put option**gives you the right to sell a given stock at a certain price by a certain time. For that privilege, you pay a premium to the seller ("writer") of the**put**, who assumes the downside risk and is obligated to**buy**the stock from you at the predetermined price.#### 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**.#### How do options work?

**Option**buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying stock (or futures contract) at a specified price until the 3rd Friday of their expiration month. There are two kinds of**options**: calls and puts. Put**options**give you the right to sell the underlying asset.

Updated: 9th October 2018