The theoretical option pricing models are used by option traders for calculating the fair value of an option on the basis of the influencing factors like market price, volatility, time to expiry, interest rates, strike price etc. The two most popular option pricing models are: Black Scholes Model which assumes that percentage change in the price of underlying follows a lognormal distribution. Then there is the Binomial Model which assumes that percentage change in price of the underlying follows a binomial distribution. In the real market, the more commonly used approach to options pricing is the Black & Scholes model and it is available not only on the stock exchange websites but also in the various broking terminals and the online trading terminals. The theoretical value of an option is the estimated value of an option derived from a mathematical model.

Bhavik Nehruanswered.