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Posted by / 15-Jul-2017 20:14

American-style equity options are typically priced using a bi-nomial model due to the early exercise feature.Investors can tweak or manually adjust inputs to any pricing model to illustrate the impact of stock movement, volatility changes or other factors that influence an option’s actual value.

If the option expires in 18 trading days and there are 252 trading days per year, you will enter time to expiration as 18/252=7.14%.

Time to expiration should be entered as % of year between the moment of pricing (now) and expiration of the option.

For example, if the option expires in 24 calendar days, you will enter 24/365=6.58%.

Interest rate does not affect the resulting option price very much in the low interest environment, which we’ve had in the recent years, but it can become very important when rates are higher.

Dividend yield should also be entered in % p.a., continuously compounded.

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This is why you may want to calculate individual parts of the formula in separate cells, as I do in the example below: First I calculate the natural logarithm of the ratio of underlying price and strike price in cell H44: =LN(A44/B44) Then I calculate the rest of the numerator of the d1 formula in cell I44: =(D44-E44 POWER(C44,2)/2)*G44 Then I calculate the denominator of the d1 formula in cell J44.