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Technology Stocks : Qwest Communications (Q) (formerly QWST)
Q 85.10+0.9%3:59 PM EST
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To: limtex who wrote (5215)10/8/1999 1:48:00 PM
From: Mike Fredericks  Read Replies (1) of 6846
 
Longish response...

There is a pricing model for options called the Black-Scholls (sp?) model, which takes current stock price, strike price, days until expiration, and the volitility of the stock into account, and then generates a "fair value" for the options. Most options trade near the Black-Schools "fair value" most of the time because so many people have programs that search for underpriced options in order to buy them.

Consider a shorter-term option, say the options that expire in 2 weeks. Consider a deep in the money option... say an option with a strike of 50 when the stock price is at 80. When the stock goes up $1, the option price will go up $1 because the likelihood is high that the option will end up in the money later on. Whereas if the stock is a volatile one like Dell, if you look at a $75 strike option, when the stock goes up $1, the option won't necessarily go up the same $1... often times it will go up less. Just like when the option is out of the money (say the $85 option when the stock is at $80) is not priced at $0 when the option is out of the money.

All this behavior has to do with the volatility portion of the equation.

Sorry if this is a confusing answer, but it's the best I could do in short order. If you don't understand this post, don't buy the options... it's not worth the risk. With options it's very easy to lose everything. Buy that $35 strike option and if the stock closes at $34 15/16, you lose all your money.

-Mike
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