Chapter 7: Pricing of Options

In this section

• Pricing of Options
  Explore the foundational concepts and models used to determine the fair value of option contracts, including real-world examples, diagrams, and practical tips for successful option pricing.
• Major Factors that Affect the Price of an Option
  Explores how underlying price, strike price, time to expiration, volatility, interest rates, and dividends influence option premiums, drawing on real-world examples and Canadian financial contexts.
• Intrinsic Value
  Uncover the built-in worth of options and learn how to measure an option’s immediate exercise value, ensuring you understand key pricing concepts, possible arbitrage scenarios, and best practices in Canadian markets.
• Time Value
  Explore the concept of time value (extrinsic value) in options pricing, how it decays over time, and why it matters to hedgers and speculators.
• Delta
  Explore Delta, the critical option Greek governing price sensitivity, hedge ratios, and probability of finishing in-the-money. Includes real-world examples, practical diagrams, personal anecdotes, and up-to-date CIRO guidelines.
• Advanced Greeks (Gamma, Theta, Vega, Rho)
  Explore the essential second-order and cross-dimensional risk metrics of options—Gamma, Theta, Vega, and Rho—and learn how they shape sophisticated hedging, speculative, and portfolio management strategies in the modern Canadian derivatives landscape.
• Implied vs. Realized Volatility (Vol Skew, Vol Smile)
  Understand how implied volatility compares to realized volatility, the significance of volatility risk premiums, and how volatility skew and smile impact option pricing in Canadian and global markets.
• Black–Scholes–Merton and Binomial Model Overviews
  Learn the foundational option pricing models—the Black–Scholes–Merton and Binomial framework—and discover how they shape modern derivatives valuation and risk management.