Valuation of options

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Further information: Option: Model implementation

Because the values of option contracts depend on a number of different variables in addition to the value of the underlying asset, they are complex to value. There are many pricing models in use, although all essentially incorporate the concepts of rational pricing, Moneyness, Option time value and Put-call parity.

Amongst the most common models are:

• Black-Scholes and the Black model
• Binomial options pricing model
• Monte Carlo option model
• Finite difference methods for option pricing

Other approaches include:

• Barone-Adesi and Whaley American option approximation
• Variance Gamma Model (see variance gamma process)
• Heath-Jarrow-Morton framework
• Heston model