Theoretical pricing models help identify discrepancies about the price of the option in the marketplace

From our discussion thus far, it ought to be obvious why serious option traders use theoretical pricing models.

First, a model tells us something about an option’s value. We can compare this value with the price of the option in the marketplace and from this choose an appropriate strategy.

Second, once we have taken a position, the model helps us quantify many of the risks that option trading entails.

This is one of the many passages and charts I find in books and articles on a daily basis. They span many disciplines, including:

I occasionally add a personal note to them.

The whole collection is available here.