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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: Tom Chwojko-Frank who wrote (230)	4/25/2001 1:19:07 PM
From: Uncle Frank	Read Replies (1) of 5205

>> Why sqrt? Because options prices are a function of the square root of time when computed using the Black Scholes Equation. risk.ifci.ch If you aren't a differential equation lover, Harrison Roth addressed the implications of this on page 24 of his book, LEAPS. Notice in the equation the SQR T... That simply means that if the length of time (measured in years and fractions of a year) is given, its square root should be used in calculations. In our example above - comparing a one year call with a three month call - one option's time to expiration is four times the other. The equation tells us that (other elements being constant) the first will be two times the cost of the second. (Two is the square root of four...). uf

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