Calls and Puts for Income Message Board

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Strategies & Market Trends : Calls and Puts for Income

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To: Jerome who wrote (141)	4/7/2007 12:38:27 AM
From: Ira Player	Read Replies (2) of 5891

Jerome, In general, if you believe in Black-Scholes type Option pricing (it is close, if you discount Implied Volatility and Interest Rate skew), the relationship between the option premium and time is pretty constant from IV of 0.2 upward (it is a little faster for IV of 0.1). I did a study a few years ago at IV intervals of 0.1(If I find it I'll publish a table showing the results) that showed that with an assumed constant IV, Interest Rate and Stock Price, an at the money Call Option will lose 50% of it's value in 75% of the time remaining. In other words, regardless of the IV of the underlying or the initial time remaining, a $5 premium will be worth $2.50 when 75% of the time to expiration has passed. It will be worth $1.25 when 93.75% of the time has passed, etc. I think of it as a "half-life" of 75%. The "6 week" time is a pattern that the mind/eye sees, but the statistics don't bear out. I prefer 4 or 5 weeks. Like the day after the last one sold expires! Ira

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