Historical Option Price

In order to understand the meaning of the term “historical option price”, it is important to first explore what is meant by these terms: “option” and “historical” in the context that the financial market uses these terms. The term “historical” – refers to over a specific period in the past. The term “option” is a type of derivative, which means the value depends on the value of the underlying investment. Investment in this case could be a share of stock, index, currency, commodity or different kinds of securities. A stock option then is contract, between a buyer or holder and the seller, known as the writer. The contract gives the owner a right without any obligation, to buy or sell a particular stock at a fixed price (the strike price) for a specific period of time (the expiration date). When the owner or investor exercises the contract right, the seller or the writer is obligated to meet the terms of delivering the shares to the right party. Trading in stock options is rather risky and can prove to be a loss for the less experienced investors. Some of its advantages are, an investor can gain leverage in a stock without committing to a trade, and the option provides protection against price fluctuations. Some disadvantages – the cost of trading options is higher on percentage basis than when trading the underlying stock, and reduces the profits. The time-sensitive nature of the option can render these options valueless. When the option availed of is the uncovered option kind, the investor is exposed to unlimited risk. Finally, in order to know what a “historical option price” is, here are the three components of option: The expiration date – shows the month in when the option expires and this happens one day after the third Friday of the expiration month. The strike price - The strike price is the price at which the holder is allowed to buy or sell the underlying stock later date. The premium – calculated as the amount the holder pays for the right to exercise the option. What are the factors that determine the value of an option? Well these are the difference between the stock price and the strike price, the remaining period the option can be exercised and the volatility of the underlying stock. As many unlucky investors

have come to realize the value of an option decreases the nearer the expiration date approaches and becomes useless after that date. One should remember that in general premiums increase as the volatility of the underlying stock increases. This is because the greater fluctuation makes the right to buy in the future at the current price more valuable. And volatility is either historical or implied. It is historical when it is based on the based on the past performance of the stock. It is implied volatility when it reflects the way options are priced in general. Knowing all the risks and disadvantages that come from exercising the historical option price, should you risk it?