# 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**.A.

### 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 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.#### What is a European call option?

A**European option**is an**option**that can only be exercised at the end of its life, at its maturity.**European options**tend to sometimes trade at a discount to their comparable American**option**because American**options**allow investors more opportunities to exercise the contract.

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.

#### What is the value of the call option?

Specifically, the intrinsic**value**of a**call option**is equal to the underlying price minus the strike price. For a**put option**, the intrinsic**value**is the strike price minus the underlying price. By definition, the only**options**that have intrinsic**value**are those that are in-the-money.#### 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**."#### How many stocks are in an options contract?

Options are traded in units called contracts. Each contract entitles the option buyer/owner to**100 shares**of the underlying stock upon expiration. Thus, if you purchase seven call option contracts, you are acquiring the right to purchase 700 shares.

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.#### Can you trade options on Etrade?

A: To**trade**put**options**with**E-trade**it is necessary to have an approved margin account. Investors may sign up for margin accounts with**E-trade**at us.**etrade**.com. An**option**is the right, but not the obligation, to buy or sell a set amount of stock for a predetermined amount of time at a predetermined price.#### 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.#### How does Robin Hood make their money?

Hi Harry,**Robinhood makes money**by collecting interest on the cash left in your brokerage account that is not invested. A few dollars here and there spread across millions of users is some serious cash.**Robinhood**also is/plans to allow users to trade on margin and borrow the**money**they would like to invest.

Updated: 9th October 2018