In the financial field, the price (premium) is paid or received for purchase or sale options. This price can be divided into two components.
This is:
- Intrinsic value
- Time value
Video Valuation of options
Nilai intrinsik
Intrinsic value is the difference between the underlying spot price and the strike price, insofar as it benefits the option holder. For call options, the option is in-the-money if the underlying spot price is higher than the strike price; then the intrinsic value is the underlying price minus the strike price. For the put option, the option is in-the-money if the price strike is higher than the underlying spot price; then the intrinsic value is the strike price minus the underlying spot price. Otherwise, its intrinsic value is zero.
For example, when a DJI call (bullish/long) option is 18,000 and the underlying DJI Index is $ 18,050 price then there is a profit of $ 50 even if the option expires today. $ 50 This is the intrinsic value of the option.
In short, intrinsic value:
- = current share price - strike price
- = strike price - current stock price (put option)
Maps Valuation of options
Time value
The preferred premium is always greater than its intrinsic value. This extra money is for the risk that the author of the option/seller did. This is called the Time value.
The time value is the amount that the option trader pays for the contract above its intrinsic value, with the belief that before the expiration the value of the contract will increase due to favorable changes in the price of the underlying asset. The longer the length of time until the end of the contract, the greater the value of time. So,
- Time value = preferred premium - intrinsic value
There are many factors that influence the choice premium. These factors influence option premiums with varying intensity. Some of these factors are listed here:
- Cost of goods: Any underlying price fluctuations (stock/index/commodity) clearly have the greatest effect on option contract premiums. The increase in the base price increases the call option premium and decreases the put option premium. The opposite is true when the base price decreases.
- The strike price: How far the strike price from the spot also affects option premiums. Say, if the NIFTY of 5000-5100 premium, 5000 strike and 5100 strike will change a lot compared to contract with 5500 or 4700.
- The underlying volatility: The underlying security is a constantly changing entity. The rate at which the price fluctuates can be referred to as volatility. So a 5% fluctuating share on both sides of every day is said to have more volatility than mis. stable blue chip stocks whose fluctuations are more benign at 2-3%. Volatility affects the call and puts the same. Higher instability increases the option premium because of the greater risk it brings to the seller.
- Dividend Payments: Dividend payments have no direct impact on the value of the derivative but have an indirect impact through the stock price. We know that if the dividend is paid, the stock goes ex-dividend therefore the stock price will go down which will result in an increase in Put premium and decrease Call premium.
Apart from above, other factors such as bond yields (or interest rates) also affect premiums. This is because the money invested by the seller can generate this risk-free income in any case and therefore when selling options; he should get over this because of the higher risks he takes.
Pricing model
Because the value of option contracts depends on a number of different variables other than the underlying asset value, they are very complex to assess. There are many pricing models to use, although they all basically include the concept of rational pricing, money, time value options, and put-call parity.
Among the most common models are:
- Black-Scholes and Black models
- Grid model: Binomial option pricing model; Trinomial Tree
- Monte Carlo option model
- The final difference method for pricing options
Other approaches include:
- Heston model
- Heath-Jarrow-Morton Frame
- Gamma variance model (see gamma variance process)
Value adjustment
After the 2008 financial crisis, "fair value" was calculated as before, but using the Overnight Index Swap (OIS) curve for discounts. (The OIS is chosen here because it reflects the interest rate for an unsecured overnight bank loan, and is thus considered a good indicator of the interbank credit market.) Thus, the risk neutral value is then adjusted for counterparty credit risk impact through credit rating adjustments, or CVA, as well as any other X-Value Adjustments that may also be added.
Source of the article : Wikipedia
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