Option Pricing

Note From The PitMaster:
Mathematical pricing models are used to calculate the theoretical price (fair value) of any option. An option's theoretical price depends upon the following factors. The most important factors are highlighted.

	type of option (call or put)
	strike price of the option
	current market price of the underlying
	statistical volatility of the underlying
	days remaining until the option expires
	the current risk free interest rate (90 day treasury bill rate)
	declared dividend amount per share (for stocks only)
	days until the ex-dividend date (for stocks only)

When an option's actual price differs from the theoretical price by any significant amount, traders try to take advantage of this situation, forcing the prices back in line, especially as the expiration date approaches.