The Black-Scholes formula

Black and Scholes have developed a model to calculate the value or price for a option. Black and Scholes received the Nobel Prize in 1997 for their efforts to create this model and for their work related to this.

The Black-Scholes model are used to calculate the price on options based on the underlying security and certain specified conditions. An option value for a share option derives its value based on the stock price, volatility, time remaining until exercise and the exercise price.

An option value consists of an intrinsic value and a time value. The intrinsic value is the difference between the stock price and the strike price. If the share price is $100 and the strike price is $90, then the intrinsic value is $10 per option. A intrinsic value is the fair value of the option at the exercise date, the intrinsic value is the only value for a option at the excericise day. The time value depends on the number of days left until excercise and volatility. 10 days until excercise gives a higher time value than 5 days left until excercise. A volatility of 100% provides a higher time value than a volatility of 50%. It is more complicated to calculate the time value than the intrinsic value. The Black & Scholes model is very good when you want to calculate the time value of a option.

The part that issues a call option can be said to have time value with him and the purchaser of a call option can be said to have a the time value against him. The same reasoning holds for put options.