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Technology Stocks : How high will Microsoft fly?
MSFT 474.15-0.9%3:19 PM EST
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To: Ibexx who wrote (1927)7/9/1997 8:09:00 PM
From: Sadim Gnik   of 74651
 
Hi Ibexx,

I see you too skulk about in the MSFT cave. You probably also hang out in the CSCO thread...yes? Great minds must think alike:).

I also have observed the kind of option premium bloat you described around times of rapid stock movement. I have concluded that it is accounted for quite nicely in the Black-Scholes model which, after you get through all the ugly math, leaves the choice of the all-important Volatility parameter "to the student". I have asked another SI member who claims to have been an options MM how this parameter is chosen by professionals. The answer was not surprising -- a dollop of historical values, a dash of guesswork based on his current state of nervousness, and a soupcon of secret sauce.

I like to play LEAPS as a source of new cash for my untouchable core (INTC,MSFT,CSCO). I find that watching the Bollinger Bands for the underlying is a good qualitative indicator of the short and medium-term volatility. When the BBs converge, buy. When they diverge following a rapid run-up, sell. I play between 5-20% of the value of my core this way trading about once a week. The best thing about this game for me is not the extra cash. Rather, it's that my penchant for gambling is satisifed - I've learned that by fiddling with marginal money, I can leave my main stash alone.

Sadim (gambler at heart) Gnik
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