Takeaways from the Book "Options trading strategies" By Scott J Danes

 Option pricing methods

Black-Scholes Model

The Black-Scholes Model is probably the most used model for pricing options. It was developed in 1973 by the economists Fischer Black, Myron Scholes, and Robert Merton. This model is used to calculate the price of European options. The formula for the model is complicated and most traders will not want to do the calculations themselves but will instead rely on one of the online options trading calculators.

Cox-Rubenstein Binomial Option Pricing Model

This model is a variation of the Black-Scholes formula. This model uses the value of the underlying security over a period time, instead of just at the expiration date. For this reason, this model is often used for valuing American options which can be exercised at any time during the contract period. Again, calculating this formula by hand is probably not what most investors are going to do and a variety of online calculators can be used for this purpose.

Put/Call Parity

Put/call parity refers to the relationship between put and call options with the same strike price and expiration date. It is used only for European-style options. It states that “the value of a call option, at one strike price, implies a fair value for the corresponding put and vice versa.”[2] Basically, the principle states that the options and underlying stock positions must have the same return. Otherwise, arbitrage, or the ability to profit from price variances, would arise and an investor could potentially profit risk free. Put/call parity is used as a simple test to see if options are priced fairly. Most online trading platforms offer a tool for analyzing put/call parity.