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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: John T. who wrote (24476)	9/2/1999 8:12:00 AM
From: Matthew L. Jones	Read Replies (2) \| Respond to of 99985

John, I think you guys are talking about two different things when you talk about implied volatility. I looked at your chart and having traded options quite a bit, the IV numbers you quoted looked odd to me. The implied volatility Haim is talking about (or at least I think he is talking about) is the volatility number that is "backed into" or "implied" by the current option prices. According to the Black-Scholes model, there are 6 variables which comprise the "theoretical" price of an option. Strike price, equity price, interest rate, dividends, time to expiration, and volatility. When looking at option prices, all of those variables are given to you (e.g., it is a certain number of days till expiration, the strike price is a certain price, the interest rate is a certain rate, dividends are generally a non-issue on the stocks you cited, the stock is at a certain price, therefore... you have 5 of the 6 variables given to you. Based on that you can solve for "implied" volatility because you know the "actual" or "market" price of the option. You can do this by being a math genius (which I am certainly not) or you can use an option calculator to figure implied volatility (my website has a link to a calculator I use regularly). For example, based on last night's close, Dell September 50 calls (DLQ IJ) have an implied volatility of 41.38% (which is actually a little lower than I remember them being a couple of months ago when I traded Dell options). You may be referring to historical volatility. I'm not quite sure. I do know that there seems to be a wide variance on quoted historical volatility (probably due to the fact that they quote different time periods). That is why it is important to calculate "implied" volatility (as this is the only true volatility). The market is the final authority when it comes to pricing. Hope this helps. Matt