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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

 

 

Comments (16)

Peter

August 29th, 2010 at 1:45am

No, but you can use an online version, like,

Option Calculator

raju jee

August 28th, 2010 at 11:47am

is there any simple java mobile application avalaible for option priceing?

Peter

March 11th, 2010 at 5:11am

Hi Maggie, yes, this formula only works for European options without dividends.

Peter.

Maggie

March 10th, 2010 at 12:04pm

If I have the the "u,d, possibility(p)" in binomial model, how can I get the volatility for BS? this is a bit academic. thanks

Peter

August 30th, 2009 at 5:11am

Yes, base price = stock (or futures) price.

vishnu

August 29th, 2009 at 12:05am

base price means stock price or other

Joe

June 17th, 2009 at 3:15am

How do you determine the volatitity?

Peter

March 26th, 2009 at 5:40pm

The $45 is the underlying stock price...not the market price of the option.

If the market price of the option was $2 then it would be undervalued as the theoretical is higher then what it is trading for in the market.

saurabh

March 25th, 2009 at 11:07pm

Thanks Peter.
please correct me, if i am wrong.
Here Theoritical value is 2.07 and the market value is 45, it means that the option is overpriced?? (The market price of the option should be 2.07 but it is 45 actually
please comment

Peter

March 25th, 2009 at 4:54am

Hi Saurabh,

The formula above only works for ATM options...not for a specific strike.

If you want a pricing model in Excel click on the Free Spreadsheet link above.

saurabh

March 25th, 2009 at 1:38am

or how do we use this to find out the strike price we add this to present market price???

saurabh

March 25th, 2009 at 1:34am

PLEASE explain me the meaning of this 2.07. how do we use this to find out ITM or OTM

Admin

January 8th, 2009 at 3:32pm

It's because this is for calculating an ATM option. The strike price is the same as the base price.

Chris

January 8th, 2009 at 5:30am

I don't see any mention of the Strike price.

PhilTheGreek

September 14th, 2008 at 12:45am

This is a result from Black-Scholes equation S*N(d1)-K*N(d2) assuming 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

September 4th, 2008 at 4:06pm

would the base price in this case be $45 ?

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