Option Pricing Model

As I mentioned on the Home page of this website, I trade options seriously.  I have developed several option pricing models based on the Black-Scholes pricing methodology and use them to determine:

  • Potential profit or loss

  • Exit points

  • The probability of a successful trade

The spreadsheet calculates the option value given the following inputs:

  • Price of the underlying asset, ie, stock or ETF

  • Strike price

  • Implied volatility - calculated* on broker’s option chain

  • Dividend yield expressed as a percentage

  • Risk-free interest rate

  • Days to expiration

Below is a video of how the model works.

*  Implied volatility is commonly derived from the price/value of a particular option, which is determined based on supply and demand;  therefore, implied volatility is a “plug” amount that evaluates to the current theoretical option price.  Since the market is efficient but seemingly moves in an “emotional” way, Black-Scholes provides a theoretical value given ones market forecast for:

  • Price of the underlying

  • Volatility, and

  • Term of the trade

Single Option Pricing Model

Free Download - Opens as a Google drive link; then simply click on the download icon in the top right-hand corner

This template contains both:

  • An Option Pricing Model, and

  • An Option Forecast Model

You can price an option at the inception of the trade and forecast its price as the trade progresses.

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