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Option Pricing

Option Greeks

A Short Option Pricing Method

If you've no time for Black and Scholes and need a quick estimate for an at-the-money call or put option, here is a simple formula.

Price = (0.4 * Volatility * Square Root(Time Ratio)) * Base Price

Time ratio is the time in years that option has until expiration. So, for a 6 month option take the square root of 0.50 (half a year).

For example: calculate the price of an ATM option (call and put) that has 3 months until expiration. The underlying volatility is 23% and the current stock price is $45.

Answer: = 0.4 * 0.23 * SQRT(.25) * 45

Option Theoretical (approx) = 2.07

 

 

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PhilTheGreek
Posted 32 days ago
This is a result from Black-Scholes equation S*N(d1)-K*N(d2) [beep] uming zero interest rate and setting S=K, gives S*{N[+0.5*volatility*sqrt(time)]-N[-0.5* volatility*sqrt(time)]} which is S*volatility*sqrt(time)/sqrt(2*pi) and 0.4 is 1/sqrt(2*pi).
adrian
Posted 41 days ago
would the base price in this case be $45 ?