Black and Scholes Options Evaluation Message Board

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Strategies & Market Trends : Black and Scholes Options Evaluation

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To: Uri Miller who wrote (2)	11/22/1996 3:06:00 AM
From: Richard Loo	of 44

Uri, Sigma (represented as a Greek letter which I can't type in) is standard deviation. It is a statistical value computed from a collection of observations. Whenver you do statistics, you'd always calculate the average and the standard deviation. In our case, we're doing statistics on stock prices. So, for example, we can take the last six month's closing prices of USRX (something that's notorious for giving investors a rough ride) and calculate a standard deviation. And we can do the same for, say, Phillip Morris (somthing that's relatively stable). The point is that sigma for USRX will be bigger than Phillip Morris because USRX swings around like crazy; as such, USRX is more "volatile". The more volatile a stock, the more valuable its option is (everything else equal). Most calculators have the [ln] button which is the natural log. Another button [log] is the more familiar common logarithm.

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