An Option Price Calculator is a tool used by traders and investors to estimate the theoretical price of an option based on various input parameters. These parameters typically include the current price of the underlying asset, the option's strike price, the time until expiration, the risk-free interest rate, the expected volatility of the underlying asset, and any dividends paid by the underlying asset.

Components of an Option Price Calculator:

• Underlying Asset Price: The current market price of the underlying asset, such as a stock, index, or commodity.
• Strike Price: The predetermined price at which the option holder can buy (for a call option) or sell (for a put option) the underlying asset.
• Time to Expiration: The length of time remaining until the option's expiration date, typically measured in days, weeks, or months.
• Risk-Free Interest Rate: The interest rate used to discount future cash flows associated with the option. This rate is often based on government bond yields or other risk-free securities.
• Expected Volatility: The anticipated level of volatility in the price of the underlying asset over the option's remaining time to expiration. Higher volatility generally leads to higher option prices.
• Dividend Yield: The rate of return paid by the underlying asset in the form of dividends. This parameter is relevant for options on dividend-paying stocks.

Working of an Option Price Calculator:

Input Parameters: Users input the relevant parameters, including the current price of the underlying asset, strike price, time to expiration, risk-free interest rate, expected volatility, and dividend yield (if applicable).

Calculation Method: The calculator uses mathematical models, such as the Black-Scholes model or the binomial option pricing model, to calculate the theoretical price of the option based on the input parameters.

Output: The calculator provides an estimated price for the option, often expressed in terms of the option's premium or intrinsic value. Additionally, it may display other option-related metrics, such as delta, gamma, theta, vega, and rho.