What is theoratical option price?

This item was filled under [ Knowledge, Option Pricing ]

Theoretical price is nothing but a theoretical value. Options price depends on many variable like remaining life of option, current volatility, current interest rate etc.. There are various models that use above variables and give us the ideal price for an option.

While theoretical value gives us good idea about what to pay for an option, be aware of its limitation while trading options. All these variables are dynamic on their own so when they change, the calculated value will also change. Moreover, market movement is a lot impacted by the psychology of participants at any moment and demand / supply equation for the underlying instrument and strike price. These new market variables are not part of option calculator. Hence market price of option is most like to be different from Theoretical value.  Hence take care of getting biased with the value.

Happy Trading

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