Class: Options Pricing
Reference Materials
- Options - Essential Concepts & Trading Strategies, edited by The Options Institute, McGraw-Hill 1999: pages 19-79
- Options For The Stock Investor, James B. Bittman, McGraw-Hill 1997: pages 57-77
"Options Pricing" (Options 301) will introduce you to the key components of theoretical option pricing. This class has been designed to help the student achieve realistic expectations about how an option position is likely to behave under various conditions. Though their predictive value has limits, the key components of theoretical option pricing still offer an excellent tool for helping investors anticipate price movements and explain price relationships between options.
Chapter 1 - Introduction
Introduces the most important elements influencing an options value, including: price of the underlying, strike price, time remaining until expiration, volatility, dividends, and prevailing interest rates. All of these factors are expandable via a convenient interactive table.
Chapter 2 - Options Pricing Models
In this chapter the actual mathematical equation for an option's theoretical value is explained and illustrated. This chapter gives a brief history of the Black & Scholes pricing model and the two professors, Fischer Black & Myron Scholes, who won a Nobel Prize in Economics for its creation.
Chapter 3 - Quantifiable Factors
This chapter gives an interactive tab for each of the six factors affecting an option's price. These tabs are expandable and offer the student tutorials, examples and a quiz at the end of each subject.
Chapter 4 - Non-Quantifiable Factors
For this chapter the student is exposed to some of the factors that can drive the theoretical value of an option that are unforeseeable and unpredictable. The factors presented are liquidity, market sentiment, investor confidence, mergers and acquisitions, and news events that affect performance expectations for the stock, its industry, or the market as a whole.
This chapter also explains the limitations of pricing models to take into account non-quantifiable factors, and that no model can predict with certainty what prices an investor will encounter in the future.