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Fair Value of an Option
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The option value computed by a probability-type option valuation model. The fair value of an option is the price or premium at which both the buyer and the writer of the option should expect to break even, neglecting the effect of commissions and other trading costs and after an adjustment for risk. Fair value is an estimate of where an option should sell in an efficient market, not where it will sell. The fair value of an option is also defined as parity plus basis plus insurance value. Also called Fair Value Premium. See also Black-Scholes Equation, Parity (2), Insurance (2), Normal Price of an Option.
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Glossary *
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