Need to price an option? Easy.. While the Financial Accounting Standards Board lists a few methods, the typical gold standard at the moment is the Black Scholes formula, made famous by Fischer Black, Myron Scholes and Robert Merton, awarded a nobel prize and is deemed a financial weapon of mass destruction. It has gained extreme publicity and yet is relatively simple to compute.. A call option is priced as:

Whats all the fuss about? The inputs are easy to understand and it takes a minute to programme. Some software packages have the function built in! In matlab: an example using the financial toolbox: 

Consider European stock options that expire in three months with a strike price of 95. Assume the underlying stocks spot price is currently 100 and pays no dividend with  volatility at 0.5 or 50% with the risk free rate at 10%, then 

[Call, Put] = blsprice(100, 95, 0.1, 0.25, 0.5) 

returns call and put prices of 13.70 and 6.35, respectively.

Options are here to stay. There are trillions of dollars, pounds and euros traded daily worldwide and are only increasing. Exciting times.

The Alpha Hunter