Option Prices & Pricing

Lesson /22
Prices & Pricing Sample Lesson
  • You will see how to translate the information on a pricing screen into a range of exposure diagram.
  • You will see how to think about and represent the Effective Buy Price of a purchased call option on Target (TGT).
  • You will review how to make an option order verbally to a broker.
  • You will review how the order affects volume and open interest -- two measures of transaction volume mentioned in the Option Market Mechanics mini-course.

People treat option pricing as though it was rocket science! The fact is that the theoretical underpinnings of option pricing is almost laughably simple. In this course, we take both a theoretical and practical approach — explaining what the complex option pricing equations are saying in visual terms and showing how pricing information is displayed on a brokerage screen.

The course…

  • shows you how to read option pricing screens and how to associate range of exposure diagrams to them,
  • describes the bid-ask spread and shows how important it is when transacting in the option market,
  • offers an intuitive explanation of option pricing, including a graphical illustration of “the Greeks”,
  • explains the concept of implied volatility — one cornerstone to option pricing,
  • shows the strengths and weaknesses of option pricing models, and
  • illustrates why the uninitiated get the impression that option prices behave so counterintuitively.

The snippet from the video you see above is from the lesson “Visualizing Option Pricing” and shows how to translate what you see on an actual, live pricing screen to the range of exposure diagrams presented in the Options Basics mini-course.

Our overall goal for this course is to give you an understanding of option pricing that is more intuitive and thorough than that of many professional traders and risk managers.

Supplemental Resources