In the world of finance, an option is a special contract, according to which a potential buyer or seller gets the right (but not the obligation) to buy or sell an asset - a real commodity, security, currency - at a predetermined price and at a specified time in the future. As derivative financial instruments, options are rightfully considered “aerobatics” in the financial sector and require specialized knowledge, skills and experience.
Instructions
Step 1
The simplest of these derivatives are the Put, Call and Double options. It is unlikely that a beginner will be able to calculate an option on his own in all details. First you need to familiarize yourself with the basics of option pricing.
Step 2
Many models are known for calculating the price of an option, most of which are based on the idea of an efficient market. Modelers assume that the fair premium for an option is equal to its value, if neither the seller nor the buyer of the option makes a profit on average.
Step 3
The premium is calculated from a probabilistic process that simulates the price behavior of the underlying asset underlying the option. Such a statistic as the range of fluctuations in the market price of an asset (volatility) is very important. The wider the scope, the higher the uncertainty in the price movement and, accordingly, the higher the risk premium received by the option seller. The next important parameter is the time until the option expires. The further to this mark, the higher the premium.
Step 4
The option cost consists of two parts. The first part is the intrinsic value of the option. It is equal to the number of points at which the option is transferred to the “in-the-money” status. In fact, this is the difference by which the price of the Put option exceeds the market price of the underlying asset, or the difference between the price of the Call option and the spot price of its asset. Intrinsic value is inherent only in in-the-money options.
Step 5
Time value is calculated as the amount by which the premium for an option is higher than the intrinsic value of the option. The size of the premium, as already mentioned, decreases as the option expiration date approaches.
Step 6
Let's give an example. The option contract expires two months after the current date. The cost of an option can be quite significant: for options that are out of the money and near the money, the premium paid for the option will be the time value. But as the option expiration date approaches, the time value begins to decrease with acceleration. At the moment of expiration of the option, it becomes equal to zero.
Step 7
If you decide to engage in operations in the options market, then, of course, such data will not be enough for you to make money management decisions. But with enough diligence and patience, the endless expanses of opportunities provided by the financial markets will open before you.
