Black And Scholes Call Premium Model

To estimate the premium of a call option, one can use the Black & Scholes model, shown here:

(1)\begin{align} C = S \cdot N(d) - PV(K) \cdot N(d - \sigma\sqrt{T}) \end{align}

where

(2)\begin{align} d = \frac{ln(\frac{S}{PV(K)})}{\sigma\sqrt{T}}+ \frac{\sigma\sqrt{T}}{2} \end{align}

C | call premium |

S | stock underlying option |

K | Exercise price |

T | Time until call expires |

$\sigma$ | underlying asset's standard deviation |

PV | present value |

The first step in estimating the call premium is to calculate the value for $d.$ After you have this value you may use a spreadsheet such as Excel to find $N(d)$ or you may look up the value for $N(d)$ in a statistical table. $N(d)$ is the cumulative normal distribution from negative infinity to $d.$ You can find $N(d)$ as the NORMSDIST function in Excel, or read it from Cumulative Normal Distribution tables.

page revision: 3, last edited: 02 Sep 2008 04:01