How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: tuck who wrote (11256)	7/21/1999 12:08:00 PM
From: Herm	Read Replies (1) of 14162

Hey Tuck, I was trying to narrow down some possible variables that would explain this oddball PUTs pricing situation. PUT pricing has been mentioned before on this forum and I don't believe we have ever nailed down the dynamics to anyone's satisfaction. Now, in McMillan's book on the same page you indicated (page 743) near the bottom there is a statement that reads: "The volatility of the underlying stock has an effect on delta." Further down the page he also indicates that with out-of-the-money options "the entire price of the option is composed of time value premium. We know that three main variables are used to calculate the price of an option. 1. Intrinsic Value - which your OTM strike of the PUTs had none when you picked them up. 2. Time - which makes up most of the premie value of the PUTs 3. Volatility - ???? Does a 20-day reading of 71.7% factored in? What was the volatility value when you first purchased the PUTs? I think there are some clues here! How does implied volatility factor in??? What we know for sure is that the Delta application sure does not hold up. I have only seen that happen with PUTs. Any other ideas or theories out there? The strong recommendations still remains that cheap PUTs are highly suggested just before a stock is going to announce earnings. Like car insurance, you hope you never have to use it! Without insurance the risk is simply too high in a market like we have lately. Example, IFMX tanked - 1 1/16s (-11+%) yesterday after the earnings news of the one time charge back for a lawsuit. Well, I sure was glad I was seating on a hunk of CC premies for the JANs 10s. I was expecting IFMX to pull back at $10 level according to the RSI and BBs. That stock moved from one from the extreme upper BB tag straight to the opposite side to tag the lower BB in one day! A technical bounce is taking place today.

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