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Technology Stocks : EURODOLLAR - SOFTWARE GOLDMINE
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To: Sergio H who wrote (39)3/8/1998 1:07:00 PM
From: Sal D  Read Replies (1) of 124
 
Edit should have posted this on the Amigo thread my apologies.

Sergio sorry to take up more of your time with this option thing but I so much want to understand (anyone else who has any thoughts on option trading please feel free to comment) referring back to post# 1474 I have some changes.

Heres how I figure it.(using the same data from post 1474, the close on Thursday 3/5/98 for NRL) Assumptions are I am following a stock and I believe the price is going to go up and I want to buy a call option.

First I figure the implied volatility on my calculation day (3/5/98) then I pick a future day and what I expect the price to be. I then recalculate using the new date, my expected price and the implied volatility I figured in my first calculation.

For my example I will say I expect NRLs price to increase 10% from
23 3/4 to 26 1/8 by 4/15/98. Using this information the best buy as I see it would be the April 22.5 call at 2 1/8. With a stock price of
26 1/8 on April 15 the call premium should be around 3 5/8. I bought the call for 2 1/8 and I sell it for 3 5/8 ( call me stupid but Im still not sure how the buy sell on the call itself works verses converting the shares maybe its to simple for me to understand) Who would by a call option from me 2 days before expiration that will be worthless. Im sorry maybe I dident research this enough or just missed it somehow.

In other words I need to research a stock and figure out what I feel the price will be down the road before I can analyze an option.

The mathematical foundation I use is the Black-Scholes option pricing model, developed by Fisher Black and Myron Scholes in 1973.
Joe
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