# The relationship between volatility and option value is called

### Option pricing models - ASX

In finance, the time value (TV) (extrinsic or instrumental value) of an option is the premium a option value to the amount of time to expiry is known as the option's theta. Time value is, as above, the difference between option value and intrinsic this value depends on the time until the expiration date and the volatility of. Many option traders rely on the "Greeks" – a collection of statistical values that measure risk, named after Greek letters – to evaluate option positions. of statistical values that measure the risk involved in an options contract in relation to Vega measures an option's sensitivity to changes in the volatility of the underlying. At expiry the option values for each possible stock price are known as they are equal to their intrinsic values. The relationship between fair value and market price Different expectations of volatility or dividends will alter the fair value result.

The number of steps in the model determines its speed, however most home PCs today can easily handle a model with or so steps, which gives a sufficient level of accuracy for calculating a theoretical fair value. The Black Scholes model First proposed by Black and Scholes in a paper published inthis analytic solution to pricing a European option on a non dividend paying asset formed the foundation for much theory in derivatives finance.

## Valuation of options

The Black Scholes formula is a continuous time analogue of the binomial model. The Black Scholes formula uses the pricing inputs to analytically produce a theoretical fair value for an option. The model has many variations which attempt, with varying levels of accuracy, to incorporate dividends and American style exercise conditions. However with computing power these days the binomial solution is more widely used. Moreover, fair value will depend on the assumptions regarding volatility levels, dividend payments and so on that are made by the person using the pricing model.

Different expectations of volatility or dividends will alter the fair value result. This means that at any one time there may be many views held simultaneously on what the fair value of a particular option is. In practice, supply and demand will often dictate at what level an option is priced in the marketplace. Traders may calculate fair value on a option to get an indication of whether the current market price is higher or lower than fair value, as part of the process of making a judgement about the market value of the option.

Volatility The volatility figure input into an option pricing model reflects the assumptions of the person using the pricing model. For the regular option trader it is sufficient to know that the volatility a trader assigns to a stock reflects expectations of how the stock price will fluctuate over a given period of time.

### Option time value - Wikipedia

Volatility is usually expressed in two ways: Historical volatility describes volatility observed in a stock over a given period of time. Price movements in the stock or underlying asset are recorded at fixed time intervals for example every day, every week, or every month over a given period. More data generally leads to more accuracy. Otherwise the intrinsic value is zero. In summary, intrinsic value: Option time value The option premium is always greater than the intrinsic value.

### Valuation of options - Wikipedia

This is called the Time value. Time value is the amount the option trader is paying for a contract above its intrinsic value, with the belief that prior to expiration the contract value will increase because of a favourable change in the price of the underlying asset.

The longer the length of time until the expiry of the contract, the greater the time value. These factors affect the premium of the option with varying intensity. Some of these factors are listed here: Price of the underlying: An increase in the underlying price increases the premium of call option and decreases the premium of put option.

## Option time value

Reverse is true when underlying price decreases. How far is the strike price from spot also affects option premium. Say, if NIFTY goes from to the premium of strike and of strike will change a lot compared to a contract with strike of or