25 lines
1.3 KiB
Plaintext
25 lines
1.3 KiB
Plaintext
49
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Chapter 3
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The InTellIgenT
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InvesTor’s guIde To
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opTIon prIcIng
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By the end of this chapter, you should understand how changes in the follow-
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ing Black-Scholes-Merton model (BSM) drivers affect the price of an option:
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1. Moneyness
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2. Forward volatility
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3. Time to expiration
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4. Interest rates and dividend yields
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Y ou will also learn about the three measures of volatility—forward, im-
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plied, and statistical. Y ou will also understand what drivers affect option
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prices the most and how simultaneous changes to more than one variable
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may work for or against an option investment position.
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In this chapter and throughout this book in general, we will not try to
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figure out a precise value for any options but just learn to realize when an op-
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tion is clearly too expensive or too cheap vis-à-vis our rational expectations
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for a fair value of the underlying stock. As such, we will discuss pricing in
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general terms; for example, “This option will be much more expensive than
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that one. ” This generality frees us from the computational difficulties that
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come about when one tries to calculate too precise a price for a given op-
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tion. The BSM is designed to give a precise answer, but for investing, simply
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knowing that the price of some security is significantly different from what
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it should be is enough to give one an investing edge. |