FM Unit V Paper: Variables impacting pricing options

Variables impacting pricing options
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Many investors leverage on the fast moving stock in the market. If you don’t know how to take advantage of such movements in the market, you might be left reeling from the losses you have incurred from your stock. To take advantage of such movements, you might want to consider using options to plan your next move. The power of an option lies in its versatility to adapt to your position in any situation that arises. However, this adaptability does come with a cost. It would be prudent to consider the variables that affect the options of pricing of stock before sticking to single option of pricing. The versatility of an option does not only see you making money when the price goes up but even when the price goes down or sideways.
There are variables that affect the pricing of these options. With a focus in the two major pricing models – Black-Scholes and Binomial Models, we compare the attributes of the primary factors that influence the pricing.
Black-Scholes model assumes an underlying stock following a geometric Brownian motion with constant volatility. That is the price of a highly traded asset is in constant uneven motion rising or falling. The Binomial model on the other hand, assumes a perfect market and removes the possibility of arbitrage of pricing. It also shortens the duration of the option. It also makes an assumption that a specific price will span until the option is worthless, hence the shorter times.
In Black-Scholes model, the expiration time of an option is T years and in binomial it expires in ...