Options are a type of derivative financial instrument, which means they have no intrinsic value in themselves (unlike a unit of company stock, which gives a right to a future stream of dividends), but rather derive their value from some underlying asset. A call option gives the holder the right to buy, at some specified time in the future, at some specified price, an asset (in this case, a unit of stock). Correspondingly, a put option gives the holder the right to sell such an asset at a given date in the future.

The price of an option can be estimated using the famous Black-Scholes model, which this calculator uses. In that model, the price of the option depends on five factors, or variables:

• The price of the underlying asset
• The price at which the option holder has the right to buy or sell the underlying asset for (called the strike price)
• The standard deviation of the underlying asset price (in other words, how variable the underlying stock price is)
• The interest rate on risk-free loans
• The amount of time between now, and the exercise date specified by the option (the time to expiration)

The holder of an American option has the right to buy or sell the underlying asset at any time he/she chooses between now and the exercise date; the holder of a European option can only exercise the option on the exercise date itself.

In practice, the Black-Scholes model is a horrendous-looking equation, and calculating the price of an option can be a real pain, which is why a price calculator like this can be very useful.