The Option Pricing Model - Instructions

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This is the basic Black-Scholes options pricing model. It was originally designed to price European options, however it is also commonly used to price American options. You can also use this tool for calculating index options.

Why do you need it? This tool is one of the essential basics for anyone interested in trading options.

How much will a particular option cost at given day and given price?

What happens to option's value if the price of the underlying security (if you trade stock options that would be this particular stock) rises by $1 tomorrow?

What if it falls by $2.1 by next week?

With this tool answering these questions might be easy and quick. All you have to do is to fill appropriate boxes and hit the "Calculate!" button.

The "Current data" section is dedicated to values derived directly from the market, whereas the "Predictions" section includes values that you forecast or for which you want to make the calculations.

Below you'll find details regarding each box in these sections:

• Choose the option type
  Choose the type of option for which the calculations will be made.

• Stock price / index value (current data)
  This is the current price of the underlying security.

• Strike price
  This is the strike price of the option, whose price you want to predict. This tool will not tell you which strike price can maximize your profits. If you want this question answered, please see our different tool - The Pyramid Optimizer and check the optimal strike price for single option (without pyramiding).

• Days to maturity (current data)
  Days that remain to the expiration date of the option, whose price you want to predict.

• Risk free rate (in %)
  The theoretical rate of return of an investment with no risk. In practice, the interest rate on a 3-month U.S. T-bill is commonly used. You can check its current value here. If you think the rate is 3.4% enter 3.4 without "%".

• Current option value
  This is the current price of the option, whose price you want to predict for different stock or index values.

• Stock price / index value (predictions)
  Predicted price of the underlying equity. Enter the price, for which you want to calculate the value of the option.

• Days to maturity (predictions)
  Days you expect to be remaining until the expiration day, when the underlying security reaches the forecasted price. If you do not wish to make such specific projections, you may simply enter "1".

• Implied volatility
  Degree of volatility implied by the market price of an option. In other words - this is the value we compute based on the current data and then use it to estimate the value of option with new (predicted) parameters.

Since the price was calculated using the Black-Scholes model, all assumptions made in this model also apply here. You can find them here.

This tool was designed for educational purposes only and may only be used as such, you use it at your own responsibility.

Please read the disclaimer on the bottom of the website