The Black-Scholes Model
Developed by Fischer Black and Myron Scholes in 1973, this is the industry-standard mathematical model used to estimate the theoretical value of European-style options.
The two most important variables for an options trader to monitor are Time to Expiry (which causes options to lose value every day due to Theta decay) and Implied Volatility (which causes option premiums to expand rapidly when the market panics).
Trading Strategy: If an option's actual market price is significantly higher than the Black-Scholes theoretical price, it means Implied Volatility is exceptionally high. This often presents a strong opportunity for option sellers (writers) rather than buyers.