Tuesday, January 13, 2015
Nuances of Stock Options Valuations for Investors
Stock options valuation also known as options pricing is probably one of the least understood parts of options trading and also one of the most dangerous assumptions that traders make. A stock options price does not always move in tandem with the price of the underlying stock. There are six factors that control the price and profit potential of options. First—the current market price of the stock. Second—the strike price of the option. Third is the remaining life of the option. Fourth is the volatility. Fifth is the interest rates and sixth is stock dividends.
With all things being equal, if a stock goes up in value, then a call option will go up in value and subsequently, a put option will go down in value. Calls and Puts essentially operate opposite to each other as far as the pricing is concerned. These days, large companies are focusing a lot on stock options. They may use them as a part of employee compensation packages or they may use them to conserve cash. Regardless of the purpose, the company needs to have some idea of the value of the options that are being exchanged.
There are some widely accepted techniques for stock options valuation, but the Black-Scholes model is the most commonly used model for stock valuation. If the options of publicly traded companies need to be evaluated, the Black-Scholes model is considered to be the best. In addition to this model, the Gordon Growth model can also be used to estimate the stock price and volatility variables. As a fund manager or as a consultant, you need to suggest a reasonable way to estimate the value of options for publicly and non-publicly traded companies. There is a lot of uncertainty in the stock options and by increasing the credibility of the stock option valuations, fund managers can pick up the right options for the companies.
There are several benefits of using the best measurement technique for stock options. The biggest benefit is that it improves the reliability of financial statements of non-publicly traded companies, which are currently into issuance of stock options.
If you are planning to invest in stock options, you can do it on your own, but you will have to be good at financial analysis. If you are not, then you can opt for some of the best stock option services. Information that you get on stock options can be convoluted and complex. You will need the best stock valuation services that provide you implicit information on these stock options. Most stock valuation service provides have teams that comprise economists and financial professionals.
These professionals have the expertise and the experience to offer in-depth information and accurate financial analysis. These consulting companies gain stock valuation expertise by working very closely with some of the best multi-national companies. While selecting stock valuation services, you need to check out of the company is committed to meeting deadlines, while providing high level of service. These services generally cater to corporations and several other legal and financial communities around the world.