Options Premium Valuation
Introduction to Options Premium Valuation
I write this essay on options premium valuation, options premium, to discuss a mental model at best options trading for dummies. There are many good websites that provide theory have mentioned the mechanics of options, and theoretical models of options premium valuation.
Market forces in Options Premium Valuation
Fundamentally, options premium valuation is subjected to market forces, which is a manifestation of behaviour of the participants. The ideal behaviour is to buy low sell high, and conversely sell high buy low. Options trading allows such flexibility within the valid time frame.
The future is uncertain. Nobody would know that a tsunami will strike Japan in March 2011. Furthermore, after all the precautions, the Fukushima Daiichi nuclear power plant would fail. Anyone predicted North Korean leader Kim Jong il’s demise in the month of Dec 2011? How about providing a true options premium valation?
Please comment here if our reader can predict the next volcano eruption, next earthquake etc accurately. Please announce yourself to the world. We need you! All of us will be most interested in the one who can tell us accurately when to buy high sell low, or buy low sell high. We can either choose to follow or choose to be contrarian?
Time and Options Premium Valuation
The options writer faces these challenges on option premium valuation. The longer dated the options, the more difficult it is to value because time creates uncertainty, the longer time, the more uncertainty.
If you are looking for a magic wand that will give the correct magic number on options value, then I apologize that reading the remaining of this essay will be time wasting. However, if you are curious as to the possibility of valuation of quantitative qualities, then I this is time worth investing.
Proxy to Options Premium Valuation
I’m am using honesty as a proxy to put forward a mental model to obtain a valuation of something that hasn’t been valued. The ultimate goal is to valuate options by deriving a model that fully describes greed and fear. Greed and fear affects the options market more than theoretical options valuation.
The reason why people believed that options trading will make all traders rich is because the successful options traders displayed their wealth openly with acquisition of expensive items. However, those who failed to make it remained buried behind their day jobs making ends meet.
It is highly probable that the unsuccessful options premium valuators kept quiet about their losses, because they felt that its lousy that their options premium valuation was wrong.