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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dominick who wrote (3163)12/21/2001 5:55:02 PM
From: Dan Duchardt  Read Replies (2) of 5205
 
Hi Dominick,

I'm a bit late to the party on this, and others have rightly questioned you on this subject, but I thought folks might like to check out the on-line calculator at the Hoadley site

hoadley.net

One thing you have to keep in mind is that option volatility is annualized. In the calculation, the variance of whatever data set you are using is multiplied by the yearly number of days, or weeks, or whatever corresponds to your data set. Otherwise volatility would depend on the number of samples used to do the calculation. If the sample is representative of the price variation over the year, it should not matter if you use a smaller sample.

Intuitively we expect the probability of the price moving far away from the starting point to depend on how long you give it to move, so one of the entry parameters must be the time you are going to hold the position. This calculator suggests that if you hold for a year (252 days), a $25 stock with 87% volatility has a 68% chance of ending in the range 9.50 to 40.50. If you hold it for two trading months (say 45 days), the probability of closing in that range goes up to 95%, and there is a 65% chance of closing between 18 and 32.

The numbers are all affected to some degree by the expected return on the underlying. I'm not sure if the model uses an annualized return, or if it is for the holding period, but all can play around with this thing if so inclined. My guess is it is the annual return. There are several other calculators for anyone who wants to dig deeper. Click the pull down menus at the top of the page to go exploring

Dan
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