• Option pricing theory is a probabilistic approach to determining the value of an option contract.
  • The main goal of option pricing theory is to calculate the probability that an option will be exercised or in the money (ITM) at expiration.
  • Increasing the option’s maturity or implied volatility will increase the price of the option, leaving everything else unchanged.
  • Some commonly used models for pricing options include the Black-Scholes model, the binomial tree, and the Monte Carlo simulation method.