The Intuition Behind Option Valuation: A Teaching Note

23 Pages Posted: 28 Jun 2002

See all articles by Thomas A. Grossman

Thomas A. Grossman

University of Calgary - Haskayne School of Business

Stephen G. Powell

Dartmouth College - Tuck School of Business

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Ying Zhang

affiliation not provided to SSRN

Abstract

Option valuation is one of the most difficult topics to teach in the basic finance course. It is intimidating to many students as being too abstract and involving too much mathematics. The purpose of this paper is to introduce the essential ideas behind option valuation using an intuitive and visual approach.

We focus on building the student's intuition about uncertainty in stock prices and its impact on option value through simple examples and simulation. Nothing more than basic knowledge of probability distributions and present value is required to understand our approach.

Suggested Citation

Grossman, Thomas A. and Powell, Stephen G. and Womack, Kent L. and Zhang, Ying, The Intuition Behind Option Valuation: A Teaching Note. Available at SSRN: https://ssrn.com/abstract=317716

Thomas A. Grossman (Contact Author)

University of Calgary - Haskayne School of Business ( email )

Calgary T2N 1N4, Alberta T2N 1N4
Canada
403-220-8478 (Phone)

Stephen G. Powell

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2844 (Phone)

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Ying Zhang

affiliation not provided to SSRN ( email )

No Address Available

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