Option pricing refers to the amount per share at which an option is traded. Options are derivative contracts that give the holder (the "buyer") the right, but not the obligation, to buy or sell the underlying instrument at an agreed-upon price on or before a specified future date. Although the holder of the option is not obligated to exercise the option, the option writer (the "seller") has an obligation to buy or sell the underlying instrument if the option is exercised.
Depending on the strategy, options trading can provide a variety of benefits, including the security of limited risk and the advantage of leverage. Another benefit is that options can protect or enhance your portfolio in rising, falling and neutral markets. Regardless of why you trade options – or the strategy you use – it's important to understand how options are priced. In this tutorial, we'll take a look at various factors that influence options pricing, as well as several popular options-pricing models that are used to determine the theoretical value of options.
[ Options are a great way to add flexibility to your portfolio, but it can be challenging to interpret expiration dates and calculate breakeven points. If you're interested in options trading, you may want to check out Investopedia's Options for Beginners Course. You will learn how options are priced, risk management techniques, and advanced concepts, like spreads and straddles, in over five hours of on-demand video, exercises, and interactive content. ]
Options Pricing: A Review of Basic Terms
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