In one of our previous guides Option Valuation Factors, we discussed the valuation factors that affect option pricing models, explained how each factor can affect the valuation of an option, and briefly touched on some of the various option pricing models available.
In this guide, we will dive deeper into the theory behind these option pricing models as well as get a full conceptual understanding of their methodology. While no one model is correct in predicting the future valuation of an option, it is still beneficial for the trader to understand how each of the models provided work to calculate option valuations.
OPTION PRICING MODELS
We will delve into the Black-Scholes model and four other prominent models used for valuing stock options. This exploration will cover their underlying theories and methodologies, detailed calculations, practical applications, and a comparative analysis of their respective advantages and disadvantages.
Each guide below provides insights into the key aspects of these models:
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