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Know About Option Valuation Before Purchasing a Stock Option

Option Valuation

A major concern for individuals that choose to purchase a stock option is the cost of that derivative. A potential investor should be aware of the option valuation model that is utilized to calculate the cost of options. Therefore, he/she will have the tools that are necessary to know if he/she is being dealt with squarely.

The Black-Scholes model is the option valuation model that options writers employ to establish stock option cost. This option valuation model takes into account all of the important aspects of a stock option, including the number of specified shares, the cost per share, and the date the contract expires.

Using this equation may be very difficult and confusing for individuals that do not have a a financial or mathematics background. However, the Black-Scholes model can be found online, accompanied by detailed, step-by-step instructions. Taking the time to become familiar with this equation may help an inexperienced investor ensure that he/she is not being taken advantage of by option traders.

NEXT: Know These Options Before Investing in the Stock Market

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