Options Premium Valuation (Final)

Options Premium Valuation


Final Proposition

The above briefly covered facets of honesty, statistics and aspects of life (or options premium valuation). There is no doubt on applicability of Normal Distribution, Central Limit Theorem, Sampling theories for options premium valuation. I propose that we perform a four-limb test to ensure that our options premium valuation method is acceptable.

Options Premium Valuation

  1. Options premium valuation should remain valid as the underlying changes with passage of time?

The impact of option premium price with time, the normal course is for time value of money based on required internal rate of return, cost of capital plus premium or risk free rate plus premium.

  1. Options premium valuation should satisfy requirement imposed by market?

Consider the systemic risks that affect performance of underlying assets. If market is trending down, it should be more profitable to write call options. However, if market is trending up, it should be more profitable to write put options.

  1. Options premium valuation should not paradox the conduct of normal course of business?

The decision on option price should factor in possible dividends, and hedging performed by option writer. This neutral hedging should not create volatility problem which could skew the market.

  1. Option premium valuation is necessary utilitarian purpose for common good?

Option prices should be sufficiently attractive for buyers to acquire for purpose of hedging. This hedging price should be reasonable from insurance premium point of view.

Options Premium Valuation

 The reasonableness should be sufficiently reflexive. We extend the ambit of Central Limit Theorem to cover qualitative hypothesis on perception ambiguity, and conclude that ambiguities have a central tendency, thus rating could be correct.

There is no known definitive research at this juncture, but this reasoning is tempting as majority of life experiences could be similar give and take (summed in Maslows Hierarchy of Needs), with few harboring outlier type of life experience, as Malcolm Gladwell his book Outlier agreed.

 Options Premium Valuation Conclusion

The question of compiling honesty into meaningful statistics is indeed challenging. It appears that using proxy problems remained the known way out. There is no rule on what proxy problem is most suitable, but up to the well learned statistician to decide. The limitation to proxy problems included recognition that applicable circumstances but not answer for all.

Look at our Options Trading 101 for basic option trading strategies. Best Options Trading for Dummies profits with sensible Options Premium Valuation.