Abstract
If stock demand and supply determine stock prices, it should be possible for them to change option premiums. We propose a new valuation formula for pricing European options on the underlying stock, the price of which is determined by its demand and supply in a given transaction. Our mathematical model and numerical evidence demonstrate that the premiums of call options are increased with the stock demand and decreased with stock supply, and that the premiums of put options move downward with the stock demand and move upward with stock supply. Rather than by a given exogenous process that describes stock prices in option pricing models, we generate the stock price process by looking at the asset’s supply and demand. This notion regarding an underlying asset’s price determination can be further applied to develop other option valuation models.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
