OptionsTaxGuy

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:

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• Potential profit or loss

• Exit points

• The probability of a successful trade

The spreadsheet calculates the option value given the following inputs:

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• 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.
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*  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:

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• Price of the underlying

• Volatility, and

• Term of the trade