Option Pricing Model

An option pricing model is any theory or model used to mathematically calculate the price for an option contract.

Two of the most important factors used in determining option price are the length of the contract and the price of the underlying asset. Other factors include the strike or exercise price and the standard deviation of the return on the underlying asset. There are different types of option pricing models but the binomial model and the Black-Scholes model are the most popular.

All option pricing models have a relatively large potential for error, especially given a longer contract because the price of the underlying asset and other factors can change over the life of the contract.