How are Options Priced?
Stock options come in two varieties. A call option is the right to buy a given asset at a fixed price on or before a specific date. A put option is the right to sell a given asset at a fixed price on or before a specific date. The asset to be bought or sold is called the underlying, the exercise price or strike price, is the price at which the underlying will be bought or sold, and the expiration date is the point in time when the option may no longer be exercised. Options are generally priced using the Black-Scholes model. It combines the time remaining until expiration, the strike price, the current price of the underlying and an estimate of future volatility known as the implied volatility (IV) to generate a theoretical price for an option. Because implied volatility is the only unknown input, proper options pricing is entirely dependent on accurate forecasts of future volatility. The usual approach is to measure the actual volatility of the underlying over the recent past, adjust f
