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Although there are several options to calculate the price of the option (most popularly known as the Theoretical Fair Value of the Option). For Instance, the Expected Gain Approach, Price Differential Approach, Binomial Model, and Black Scholes. But the latter two are the most commonly known and used for the purpose of calculating the price of the option. And also out of these two, Binomial also suffers from some challenges, making it difficult to use.

Under the binomial model, the price of the option has been computed firstly, by assuming that the price of the share can either increase to some extent or decrease to some extent. For instance, the current market price as well as the strike price of a share is Rs 50. Now suppose it can move up either to Rs 60 (S1 say) or to Rs 40 (S2 say). Now we will calculate the value of the option at both the prices S1 and S2, i.e. C1=10 (Max of (60-50,0)), and C2=0 (Max of (40-50,0)). Based on that we will calculate the hedge ratio, [(C1-C2)/(S1-S2)]=0.5. Assuming that we can make fractional purchases, we will borrow an amount based upon the ratio of 0.5, and considering the market rate of Interest say 12%. So borrowing would be [0.5*{40/1.12}]=Rs 17.85. Fair Value of Call Option would be [(0.5*50)-17.86]=Rs 7.15. The calculation made considers the impact of both increases as well as a decrease on the price of the share.

But some of its assumptions are that portfolio value is maintained at the same level. And suppose the probability in the above-mentioned example that the chances of price increases are 90% and that of decrease would be 10%. No such use of such information is made in this model. And also this method believes that there are only 2 options available to investors to choose from, i.e. Rs 60 and Rs 40. Due to these assumptions, this method is quite lesser used.

Black Scholes model, however, overcomes some of its limitations like that, under this method consideration has been made to consider multiple levels, which got restricted only to 2 levels in the binomial model.

But it has its own assumptions like that there are no taxes on transaction costs, shares do not pay any kind of dividend during the option period, short selling is permitted and that too without any penalty, and share prices move randomly in continuous time.

All such assumptions make it difficult to work in practical situations.

We can overcome such by using another model like the GARCH Model, which although not perfect but overcomes some of its limitations. We can also make use of several strategies like to strangle, straddle, butterflies, etc, in order to prevent loss from options trading.