Basics of Options Trading FAQs

What are various pricing models for Options ?

Options pricing models are used by traders to determine the fair value of options. Two of the most common models are the Binomial Model and Black Scholes Model.


Black-Scholes' pricing model considers five key factors that affect an option's value: stock price, strike price volatility, expiration time, risk free interest rate, and volatility. This is used to calculate an option's fair value. The model assumes that the percentage change in price of the underlying follows the lognormal distribution. This formula is:


The following formula is used to calculate the option price:


C = Option Premium = SN (d1) - Xe-rt N (d2)


d1 = [ln(S / X/ X) + (r+ s2/2)t]/vt




This is where you can find:


Algorithm ln=


e= exponential function


N is equals to Normal Distribution of Standard with Mean = 0 , Standard Deviation = 1


C = Price of an Option


S is Instrument's underlying price 


X = strike price (for the option)


r = Risk-free interest rate


T = Time to Expire


s = volatility


Black-Scholes' option pricing model is well-known for its ability to quickly calculate a large number options prices. It does not take into account dividends that the company has announced when calculating Option prices. It is also not appropriate to calculate American options.


Because it is easy to understand, the Binomial Option Pricing Model is very popular. It assumes that the underlying price does not change or increase. The model breaks down the expiration time into smaller intervals and calculates the price for each interval. It creates a tree with different prices by working from the present to expiration.


While the Binomial Pricing model is simple and well-liked, it can be slow at calculating prices for a large number options. It is however useful for calculating American Options' prices.

What is the work of Options ?

How many types of Options ?

What is strike price of option ?

When does Options expire?

What is the process for trading options ?

How futures and Options are different ?

How Nifty can be traded ?

What will happen when an option expires out of money ?

Do I have to pay margin in Options ?

How can the Options contracts be settled ?

What do you mean by Covered Options ?

When do you mean by Naked Options ?

What does American Options refers to ?

What does European option mean? ?

In Options , What is the meaning of At-The-Money , Out-of-the-Money (OTM) and In-The-Money ?

How to take decision on either to buy /sell call Option or put Option ?

Is it possible to trade on option of any stock or index?

How Square off and exercise an Option is different ?

What does intrinsic value of an option mean and how to calculate intrinsic value of an option ?

What does time value of an Option mean ?