Pricing Theory
How is the Price Calculated?
It's not random. There is a Nobel Prize-winning mathematical formula that determines the "fair value" of every option.
A Brief History Lesson (1973)
Before 1973, buying an option was like haggling at a flea market. Prices were all over the place, and it was hard to know if you were getting a fair deal.
Then came Black, Scholes, and Merton. These three economists released a formula that changed finance forever. It allowed anyone to calculate the theoretical value of an option based on 5 inputs.
The 5 Inputs
The machine takes these 5 numbers, crunches them, and spits out the Premium price.
Stock Price
Where is the stock right now vs. your target? This determines intrinsic value.
Strike Price
The target price you selected. Further away strikes are cheaper (less likely to hit).
Time to Expiration
More time = More cost. You are paying for the "opportunity" for the stock to move.
Volatility (IV)
Is the stock wild or calm? Wild stocks have expensive options because big moves are likely.
Interest Rates
The "risk-free" rate. Higher rates make Calls more expensive and Puts cheaper.
The Black-Scholes Model
Interactive Simulator
Configure Inputs
Stock Price: $100.00
$100
30d
20%
5%
Theoretical Prices
Call Price
$0.00
x 100 = $0
Put Price
$0.00
x 100 = $0
Calculated real-time using Black-Scholes formula.