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Technology Stocks : Dell Technologies Inc.

DELL 126.42

+2.8%

Dec 19 9:30 AM EST

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To: freeus who wrote (81840)	11/23/1998 4:09:00 PM
From: BGR	Read Replies (1) of 176387

Freeus, Please do not be influenced by my post into making your investment decisions. I would feel real bad if I end up scaring you into taking a financially hazardous decision. That is not my goal; I am only trying to explain options from a very high level. These are not trading advices in any way. About fair value of options: When you sold the DELL calls, I believe you received a fair price based on the underlying equity properties at the time of the transaction. An option is always fairly valued but the underlying variables may or may not be depending upon your valuation model. Let's consider the variables at the time of sale: Hypothetical values: Option Strike price: 70 DELL stock price: 66 DELL historic 6-month volatility: 65 Time to expiry: 30 days Interest rate: 4.75% Dividend: 0% Given these parameters Black-Scholes model will quote you a fair option value which will closely track the market value of the option. From that one can calculate DELL implied volatility (volatility back calculated from the option price): 67 (say) Now the question to ask is not whether the option is fairly valued given the parameters, which is most probably true. The question to ask is whether the underlying parameters are fairly valued. I generally ignore interest rates (i.e. I do not speculate on interest rate fluctuations which anyway are negligible for short term options). The time to expiry being a monotonically decreasing linear function over the life of the option is also not relevant IMO (this may not be true for LEAPS as I had earlier mentioned). The two things I watch for are volatility and stock price. If I consider DELL stock to be (under/over)valued at 66, I would not sell/buy calls, I would buy/sell calls instead. If the implied volatility is over/under the 6 month historical average, I will sell/buy calls. The last remaining variable is the strike price, in deciding which I look at the delta of that particular option and decide based on my risk preference - but I would rather not go into that right now. In general, I follow two simple rules: 1. If the stock is (under/over)valued by my valuation model, so is the derivative. 2. If implied volatility (you can use the options calculator in the CBOE site to calculate it) is over/under 6 month historical average, the option is (over/under)valued. Hope this helps. I understand that I rambled a bit too much in my previous post. Please ask questions if any. Would be happy to help. Gotta go! -Apratim.

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