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The Intelligent Option Investor: Applying Value Investing to the World of Options by Erik Kobayashi-Solomon

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Chapter 3

THE INTELLIGENT INVESTOR’S GUIDE TO OPTION PRICING

By the end of this chapter, you should understand how changes in the following Black-Scholes-Merton model (BSM) drivers affect the price of an option:

        1. Moneyness

        2. Forward volatility

        3. Time to expiration

        4. Interest rates and dividend yields

You will also learn about the three measures of volatility—forward, implied, and statistical. You will also understand what drivers affect option prices the most and how simultaneous changes to more than one variable may work for or against an option investment position.

In this chapter and throughout this book in general, we will not try to figure out a precise value for any options but just learn to realize ...

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