Fair Value

Fair value is a theoretical price for a financial instrument, calculated by a mathematical model rather than observed directly from trading. Instead of asking "what did it last trade at," fair value asks "what should this be worth, given a set of known inputs."

For options, fair value usually comes from a pricing model such as Black-Scholes, which takes inputs like the underlying stock's price, the option's strike price, time remaining until expiration, interest rates, and expected volatility, and outputs a price. If the option is trading above that number in the market, traders might call it "rich" or "overpriced"; if it trades below, "cheap." The model's output is a reference point, not a guarantee of where the market will actually trade.

For stock index futures, fair value has a more specific meaning: it's the theoretical price of the futures contract relative to the underlying index, based on the cost of carrying that index (accounting for interest rates and the dividends the index would pay out) until the futures contract expires. News outlets and pre-market commentary often quote "fair value" for S&P 500 or Nasdaq futures to gauge whether the futures are trading rich or cheap relative to where the cash index closed, which feeds into estimates of how the market will open.

The nuance that trips people up is that fair value is a model output, not a market fact. Two different models, or the same model with different volatility assumptions, will produce different fair values for the identical option. It is also sometimes used loosely to mean "intrinsic value" (the value an option would have if exercised right now), which is a different and narrower concept. Fair value is broader — it includes time value and other model-driven adjustments, not just the immediate exercise value.