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To: Clappy who wrote (8140)	3/19/2000 10:46:00 AM
From: Uncle Frank	Read Replies (1) \| Respond to of 35685

>> Is there an actual mathmatical formula you could post that may help me understand it further? The formula used to determine the value of an option is called the Black-Scholes Equation, but I'm not sure reading it will help you any more that it's helped me <gg>: risk.ifci.ch The key thing that comes out of it, as Techguerilla noted, is that the time premium portion of an option's cost is a function of the square root of time. As a result, long term options have a lower cost per month than short term ones. Here's a practical example: qcom closed at 136 1/4 on Friday. aafde (qcom april 2000 125 strike price calls) ask price = $18 7/8 intrinsic value = 136 1/4 - 125 = 11 1/4 time and volatility premium = 18 7/8 - 11 1/4 = 7 3/8 yqjae (qcom january 2002 125 strike price calls) ask price = 56 1/8 intrinsic value = 136 1/4 - 125 = 11 1/4 time and volatility premium = 56 1/8 - 11 1/4 = 44 7/8 It would cost you $7.38 to lease the growth of qcom for one month, but 44 7/8 (or $2.04 per month) to lease the growth of qcom for 22 months. Hope that helps. uf

To: Clappy who wrote (8140)	3/19/2000 2:21:00 PM
From: Jim Willie CB	Read Replies (3) \| Respond to of 35685

a rough cut at option pricing, not a formula though options are priced as a function of several key components - price of common share versus option strike price - remaining time up to expiration - volatility of the underlying stock price - volume traded in the underlying stock - prevailing interest rates the difference between strike price and common share is called intrinsic value... as an option comes toward expiration, its value approaches the greater of this intrinsic value and zero subtract the intrinsic value from an option's price, and you are left with time premium... premium typically is comprised of a steadily percentage of the common share price per week... as the week's diminish, the premium decay accelerates according to some square root rate stock's whose prices have a large volatility (high variation from day to day, week to week) are priced higher in their options... the reasoning is that a volatile stock will provide you a likely open window for profit or loss, thus greater risk, thus higher price... the opposite is a flatline stock, which has little volatility, little risk, lower price the higher the interest rate, the higher the cost of money and the cost of risk, thus higher option price this is all rough, but hope it helps not intended to be a thorough treatment / JW