Evaluation of option

Intuitively, the value of a option (the premium to spend to acquire it) represents the probability of exerting this one: the more probable the exercise is, the more the option will be expensive.

This theoretical value, that the option is of purchase or sale, depends on various factors, in particular:

  • the difference between the price of exercise and the current price (stock exchange courts) of the subjacent Active ;
  • duration remaining to run (“value time”) before the expiry of fallen from the option;
  • the Interest rate applicable to this duration;
  • the Volatility of this course (and also of the course of the option itself);
  • the type of option, from where models of evaluation different according to whether it is a question from one:
    • European Option: Model Black-Scholes;
    • American Option: binomial Model.

In particular, a option to buy ( of sale ) will be worth all the more expensive as:

  • the price of exercise will be low ( high );
  • the expiration date will be distant;
  • the volatility anticipated of subjacent will be high.

All these factors increase the probability that the option is in the currency (i.e. present an interest to be exerted).

The value of the option is commonly shared in intrinsic value and value time.

Intrinsic value

It represents the profit which would be obtained if the option were exerted immediately. It is always positive or null, because an option is a right and not an obligation.

When the option is in the currency , in English in the money , its intrinsic value is positive.

When the option is with the currency ( At the money ) or apart from the currency ( out off the money ), its intrinsic value is null.

A option to buy ( cal ) is in the currency when the price of exercise is inférieur during the subjacent one (I less expensive can acheter this subjacent by exerting my cal than if I bought it on the market). It is with the currency when the price of exercise is equal during the subjacent one (that is equal for me to exert or not my cal ). It is apart from the currency if the price of exercise is higher during the subjacent one (I do not may find it beneficial to exert my purchasing right).

Contrary, a option to sell ( could ) is in the currency when the price of exercise is supérieur during the subjacent one (I expensive can vendre this subjacent by exerting my could than if I sold it on the market).

Value time

The value time represents the valorization of the probability that the option becomes in the currency enters today and the expiry.

Except in the event of dysfunctions serious of the market, it is always strictly positive, and becomes null only at the time of the expiry of the option. One value-time negative would allow a arbitration in fine without risk - though not necessarily without intermediate risk of valorization.

See too

Random links:Lachaussée | Kristian Johansson | Flying Simon | Phytalos | Jean-Joseph Fiegenschuh | Comté_de_Crockett,_le_Texas