An exact analytical solutionwith the Black-Scholes model for the American options is notpossible, because of the complexity of the boundary conditions(see subsection 11.2.4).The binomial model breaks down the time to expiration of an optioninto potentially very large number of time intervals, or steps. Atree of stock prices is initially produced, moving forward fromthe present to expiration. Conversely, TV can be thought of as the price an investor is willing to pay for potential upside.TV decays to zero at expiration, with a generaOption Value and Pricing Calculate value of european put option ideas are Options Priced.
Beyond this simple supply and demand explanation of option pricing, you should also know that there are several formulas that Wall Street mathematicians have developed to approximate a fair price of call and put options. The most popular calculage is called The Black Scholes Option Pricing Model. You might have had success beating the market by trading stocks using a disciplined process that anticipates a nice move either up or down.
Many traders have also gained the confidence to make money in the stock market by identifying one or two good stocks that may make a big move soon. A european call (put) option is essentially a contract which by paying a fee gives calcylate the right to buy (sell) a stock at a predetermined price, the strike price, at a future date. This kind of contracts was originally intended as eurkpean insurance tool for companies to fix the selling price of their goods and hedge the price risk.Options have some interesting features, for starters, if you are the buyer of an option the payoff is potentially unlimited and the loss is limited to the option price as you can see by ejropean payoff diagram belowof course the reverse is true for the seller (huge downside and limited upside).An interesting question is: how to price options.