Theoretical price

The theoretical price of an option, often referred to as "fair value," is the estimated price at which an option should trade based on mathematical models, such as the Black-Scholes model. This price is calculated using various factors, including the underlying asset's price, the option's strike price, time to expiration, volatility, interest rates, and dividends. The theoretical price helps traders determine whether an option is overvalued or undervalued in the market.

The theoretical price becomes even more critical in situations with insufficient market data, such as limited bids and asks, especially for far out-of-the-money options. Without adequate market quotes, the pricing model may be the only reliable tool available to estimate the option's value. This is particularly important in low-liquidity markets or when trading less popular options, where real-time pricing information may be sparse.