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Strategies & Market Trends : Canadian Options
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To: Derrick Burry who wrote (422)5/7/1997 8:50:00 PM
From: Dave.S   of 1599
 
I will take this one Porter.

The formula used is the Black-Scholes model. This was introduced in 1973 by Fisher Black and Myron Scholes.

The 5 characteristics of an option and its underlying stock are:

1) The option's exercise price

2) The time to expiry

3) The price of the underlying stock

4) Interest rates

5) The volatility of the underlying contract

Knowing the above 5 inputs we can calculate the theoretical value of the option.

Inversely, if we know the value of the option (as supplied by Porter and other market makers) we can calculate the implied volatility of the option. This can be quite different than the historical value for many reasons.

The formula for a European call option is:

C=U*(e(-rt))*N(h) - E*(e(-rt))*N(h-v/t)

where U = price of the underlying
E = Exercise price
t = time to expiry
v = volatility in per cent
r = risk free interest rate
e = base of the natural log
N(h) = normal distribution curve
h = don't ask

The best book that I've got on the subject is Option Volatility and Pricing Strategies by Sheldon Natenberg. Probus Publishing Company, Chicago.

By the way we will not be hearing from Peter McClaren again on this thread. His is trading options for Scotia on the new floor and tells me he cannot participate because of this. Maybe if he used a pseudo-name... Good luck on your new job Peter!

I just read on the Bre-X thread that BXM is to be de-listed immediately! Hooray! That stock has been a pain for all traders at the TSE because of the many system crashes it has caused.
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