Normal Price of an Option

The option price predicted by an econometric model or any similar technique used to estimate typical underlying price-option price relationships. The normal price is an estimate based on the assumption that relationships that existed in a prior period are still meaningful. Normal price is a prediction of what an option price will be, not necessarily what it should be if fairly valued relative to likely payoffs at expiration. In contrast to a market neutral hedged position taken at fair value, a position taken at normal price does not necessarily offer an investor the expectation of earning the risk-free rate if the neutral hedged position is maintained (without frictional costs) through expiration. Also called Average Price of an Option. See Fair Value of an Option.

Glossary * N