Jump to content

How to estimate the time value of option?


benchmark
 Share

Recommended Posts

For example, BAC is at $15.30 but Jan 16 15 option is trading around $1.80, so time value is $1.5 -- how do you estimate this to know if it's reasonable or not?

 

i think a good way to judge if an option it's overpriced is to look at the the implied volatility. Usually stated as a percentage. that percentage is basically implying how much the market thinks that a stock will move in a year. Unless you have a model of what you think volatility should be or are an options market maker, you probably wont know if the volatility is over or under priced. As a general rule though, you probably want to stay away from buying options in stocks that have news or are implied to move a lot. An example is HLF or stocks that have earnings coming up.(everyone knows that HLF might be a pyramid scheme and stocks move a lot more on earnings and often times are priced to move 10-15% move in a day)

Link to comment
Share on other sites

For example, BAC is at $15.30 but Jan 16 15 option is trading around $1.80, so time value is $1.5 -- how do you estimate this to know if it's reasonable or not?

 

http://zingfin.quora.com/Advanced-Black-Scholes-calculation-with-a-real-example

 

https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/Black-Scholes/v/implied-volatility

 

http://investexcel.net/implied-volatility-excel/

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...