# 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.

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 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 probability formula?

For the coin flip example, N = 2 and π = 0.5. The**formula**for the**binomial**distribution is shown below: where P(x) is the**probability**of x successes out of N trials, N is the number of trials, and π is the**probability**of success on a given trial.#### What is an example of a binomial?

Our first**binomial**is 5x+3y, and our second**binomial**is 4x+7y. The first term of both**binomials**have the same variable to the same exponent, x. The second term of both**binomials**also shares a variable to the same exponent, y. In this**example**, we end up with an expression that is not a**binomial**.

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.#### 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 the volatility smile?

A**volatility smile**is a geographical pattern of implied**volatility**for a series of options that has the same expiration date. When plotted against strike prices, these implied volatilities can create a line that slopes upward on either end; hence the term "**smile**."#### What is the binomial method?

In finance, the**binomial**options pricing**model**(BOPM) provides a generalizable numerical**method**for the valuation of options. The**binomial model**was first proposed by Cox, Ross and Rubinstein in 1979.

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.#### 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.#### What happens if an option expires in the money?

Call**Options**Expiring In The Money. When a call**option expires**in the money The seller of a call**option**that**expires**in the money is required to sell 100 shares of the stock at the**option's**strike price. Short**options**that are at least $.01 ITM at**expiration**are automatically exercised by most brokerage firms.

Updated: 9th October 2018