How Are Stock Options Priced?
June 8, 2017
Success in trading comes out of a disciplined process. Beating the market while trading stocks depends more on the anticipation of the upward movement or downward movement of the stocks or assets. Identifying the right stocks which can show a good upward movement and success in trading ups the confidence quotient of the traders. Being a smart trader, this has to be identified at the right time to take in the profits.
But, if, as a trader, one is not able to take the right and smart decision, then it is high time that one looks into options. There are some simple factors that investors can consider when planning to trade options so to take advantage of the stock movements.
For this, understanding the option pricing and value is critical so as to become a successful trader.
Before getting into trading options it is imperative to have a good understanding of the different factors that determine the value of an option. Some of these factors are current stock price, the intrinsic value, volatility, interest rates, and cash dividends paid. These are the building blocks, which any trader dealing in options trading should know about.
The seven main factors that determine an options price are as follows:
- Current stock price
- Strike price
- Type of option
- Expiration time
- Interest rates
All these above parameters are used to determine the market value of an option. There are different types of pricing models, which use these parameters to set the price of the stock option. The most widely used pricing model is the Black-Scholes model. Here, in this pricing model, all the above-mentioned six parameters are known except for the last parameter, which is volatility. This particular factor is supposed to be the variable that is to be estimated.
Knowing how options are priced is very important to know how to trade in options and how to make the most of the options trading. One of the key factors that determine the price of an option is the intrinsic value. Intrinsic value is nothing but the amount by which the strike price of an option is in with respect to its time value. To put it even more in simple terms, intrinsic value is the difference between the spot price and the strike price. this is generally in favor of the options holder.
Trading in binary options through software like Infinity app and others are making it quite easy for day traders, as it is very easy to operate. Sometimes, knowing just the bare basics works out fine while trading, to make good profits.