Are you trying to determine the value of your options? To do so, you need to use an option calculator and input a variety of information about the option. Today, we are going to discuss what information you need to obtain and input into a calculator for options so you can obtain the value of those options and see how movements within those certain fields will affect your option's price over time.
Obtaining Your Option's Price
Maturity- Each option you purchase will have a starting date and a date of maturity. You will need to enter both of these dates into the calculator to determine the time until maturity. This time value is one of the three main factors, along with moneyness and volatility, that determine the price of an option.
Interest Rate- The interest rate, or the rate at which a certain amount of interest is paid by you to your lender for use of principal you borrow, is an important entry in the option calculator. This rate can vary, especially if you have established an agreement with another party to swap interest rates for certain options to limit your exposure in the market.
Call or Put Option- You must indicate on the option calculator whether your option is a call or put. If it is a call option, this means you have established a contract with the seller of the option to have the right to purchase the option by a certain date. A put means you have established a contract with a buyer and have obtained the right to sell the option. You are not obligated to buy or sell with either one of these, however, you only have until a certain date, that both parties have agreed to, to decide whether you are going to sell or buy.
Underlying Price- This is the price of the underlying instrument on which the option is being bought or sold on, such as cash index, commodity, or stock.
Volatility- Volatility is one of the three main factors that are used to determine an option's price. This indicates the amount of change can be anticipated in the underlying price of the option. There are two different types of volatility; historical volatility is calculated by looking at the way the underlying price has changed in the past, and implied volatility is determined by looking at other prices for options in the market.
Strike Price- When you agree to sell or buy and option, the strike price is the amount of money you and the other party agree to exchange for the option. This amount is only exchanged, however, if the buyer and seller decide it should be exercised.
Currency- Different types of currency can affect the price of your options and the interest rates charged, so it is important to enter whether your option is European, American, or some other currency.
When you enter all of this data into the option calculator, you simply have to click a few buttons to determine its value. If you want to see how changes to your interest rates, volatility, and currency can affect the value, you can tweak the numbers. This tool is easy to use, and is essential for anyone wanting to buy or sell options.
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