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[Req] How to value American Option if price of stock is X tomorrow.

  • 29-10-2008 12:34pm
    #1
    FrCrilly
    Closed Accounts Posts: 528 ✭✭✭


    Hi All,

    I’m currently stuck on below query. Any help would be greatly appreciated. Thanks in Advance for all responses.

    Query In Short.

    I have a stock that is currently priced $78. I take out an American call option with strike price $80 on this stock. If the price of the stock was to rise to $85 tomorrow, can I approximate how much this American Option would then be worth? (ie Today, can I estimate the value of this American Option if the stock moves to $85 tomorrow)
    Is there software that can do this for me?

    Query In Longer Form

    I have some understanding of the binomial pricing model. If the stock price was to move to $85 tomorrow, I’m aware it’s possible to estimate the American Options value by drawing an expectation tree all the way to the end of the American Options life. This involves calculating the probability of an up movement and probability of a down movement. These are both based on a sigma figure which in turn is based on the stock price movement. Therefore, to calculate the American Option value at $85 stock price, I need to calculate a sigma figure that takes the stock price movement from $78 to $85 into account. How exactly can this be done? Again, is there software that can do all this for me.


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