OPTIONS Binomial
The OptionsBin function in FinTools XL is designed to calculate the theoretical price and sensitivities (the Greeks) of options using the binomial model, a widely utilized method in option pricing that provides a discrete time approach for modeling the stochastic process of underlying asset prices.
Inputs
Model: The number of iterations in the binomial tree. This determines the number of intervals the option's life will be divided into for the purpose of the model. More steps generally provide a more accurate approximation but increase the computational intensity.
Underlying: The current price of the underlying asset.
Exercise: The price at which the asset can be bought (call) or sold (put) at.
Time: The time to expiration of the option, expressed in years, between the Value Date and the Expiration Date.
Volatility: The annualized volatility of the underlying asset's returns, expressed as a decimal.
Interest Rate: The risk-free interest rate, expressed as a decimal.
Dividend Yield: The annual dividend yield expressed as a percentage of the underlying asset price.
Outputs
Theoretical Value Theoretical value of the option using a binomial model
Delta The rate of change of the theoretical value of the option with respect to changes in the underlying asset's price
Gamma The rate of change in Delta with respect to changes in the underlying asset's price
Gamma 1% The rate of change in Gamma for a 1% change in the underlying asset's price
Theta The rate of decline in the theoretical value of the option with respect to the passage of time
Vega The rate of change of the theoretical value of the option with respect to the volatility of the underlying asset
Implied Volatility The expected volatility of the underlying asset derived from the market price of the option
Intrinsic Value The intrinsic value of the option based on the difference between the underlying asset's market price and the strike price
Time Value The portion of the option's price exceeding the intrinsic value, attributed to the time remaining until expiration
Zero Volatility The theoretical value of the option if the volatility of the underlying asset was zero
Delta 100's The Delta of the option adjusted for 100 shares of the underlying asset
Lambda A measure of leverage, Lambda represents the percentage change in the option value per percentage change in the underlying asset price
Theta (-7 Days) The change in the option's Theta as the time to expiration approaches the last 7 days
Rho The rate of change of the theoretical value of the option with respect to changes in the risk-free interest rate
Psi The sensitivity of the option value to changes in the yield of the underlying asset
Strike Sensitivity The sensitivity of the option value to changes in the strike price
Implied Strike The strike price that, if used in the theoretical model, would align the model value with the market value