Tom,
If I recall correctly (and if I don't, someone will correct me), The theoretical price of an option as describes by Black Shoces (sp) model has four (4) components.
1. Volatility of the underlying stock (Beta). The higher the volatility, the greater the statistical odds of reaching a certain strike price.
2. Current interest rates for cash (since option sellers get to hold cash that can earn interest).
3. The volatility and direction of the market (and this factors in market sentiment). i.e. puts may be twice the premium of calls if everybody is expecting the market to fall. Theoretically, running the Black sholes model would tell you this, because interest rates and the volatility of the market and individual stocks are going to be the same. Thus, if one is priced way higher than the other, than one type of option (calls vs. puts) are more in popularity than the other.
4. There is one more component, but I can't remember it. Damn, I'll have to look at my finance text and get back to you.
As to premiums for AFCI vs VVUS, CIEN and AOL, Volatility for the underlying stock weights most heavily since again, interest rates and the general direction of the market are a constant. However, sectors and industries behave differently during differnt economic conditons. When high tech go down (or down), CIEN and AOL may experience more market risk for that trend than VVUS, which is in another industry.
Chester |
