What is a Theoretical Value?
Sometimes referred to as a fair or hypothetical value, a theoretical value is the estimated price of an option. The options pricing may have to do with buying, selling, or a combination of the two. In most cases, the theoretical value is calculated using some specific type of mathematical equation. There are several such models in use today. One of the most popular models for estimating the price of options is know as the Black-Scholes Option Pricing Model. First introduced in 1973, this formula was the brainchild of Fischer Black and Myron Scholes. Considered to be highly accurate, the concept quickly gained attention and remains one of the most workable of all formulas in common use today. Calculating the theoretical value is helpful to investors in a couple of ways. First, the determination of a hypothetical value for the option or options, given specific market conditions, can provide insight into whether the purchase or sale of the security is a good idea. The theoretical value, o
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- What is a Theoretical Value?
