Options Pricing Theory

Options Pricing Theory is a financial framework used to determine the fair value of options—contracts that give the right, but not the obligation, to buy or sell an asset at a predetermined price. The theory considers factors like the asset's current price, the option's strike price, time until expiration, interest rates, and market volatility. The most famous model is the Black-Scholes model, which provides a mathematical formula to estimate an option's price based on these variables. This helps investors make informed decisions about buying or selling options in the financial markets.