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Non-Tech : The Critical Investing Workshop

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To: Clappy who wrote (8140)	3/19/2000 10:46:00 AM
From: Uncle Frank	Read Replies (1) of 35685

>> Is there an actual mathmatical formula you could post that may help me understand it further? The formula used to determine the value of an option is called the Black-Scholes Equation, but I'm not sure reading it will help you any more that it's helped me <gg>: risk.ifci.ch The key thing that comes out of it, as Techguerilla noted, is that the time premium portion of an option's cost is a function of the square root of time. As a result, long term options have a lower cost per month than short term ones. Here's a practical example: qcom closed at 136 1/4 on Friday. aafde (qcom april 2000 125 strike price calls) ask price = $18 7/8 intrinsic value = 136 1/4 - 125 = 11 1/4 time and volatility premium = 18 7/8 - 11 1/4 = 7 3/8 yqjae (qcom january 2002 125 strike price calls) ask price = 56 1/8 intrinsic value = 136 1/4 - 125 = 11 1/4 time and volatility premium = 56 1/8 - 11 1/4 = 44 7/8 It would cost you $7.38 to lease the growth of qcom for one month, but 44 7/8 (or $2.04 per month) to lease the growth of qcom for 22 months. Hope that helps. uf

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