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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: Dinesh who wrote (107942)	4/26/2000 11:37:00 AM
From: niceguy767	Read Replies (1) \| Respond to of 1574509

Dinesh: Re: "Black Scholes, if memory serves, was based on the European style of options. It is a reasonably good approximation since few exercize midterm, but does not fully compute the risk (or, benefit)." Comment: Been a long time since I looked at the Black Scholes model, but it seems to me I was able to back in all the variables to determine current option price...It also seems to me that the "volatility factor" which was calculated based on a finite preceding interval, was a key pricing determinant...I'm not just sure what you mean about fully computing risk or benefit...

To: Dinesh who wrote (107942)	4/26/2000 11:59:00 AM
From: kash johal	Read Replies (1) \| Respond to of 1574509

Dinesh, A lot of the models are simplistic as they don't take taxation into account. Covered calls can help on tax management. As an example i wrote 170 Jan 2001 calls for around $9.00 If AMD hits $120 next month(as niceguy assures me) these calls may become worth $40++ or so. If I buy these back I will have a $30 loss or around $500K. This can be used to offset my gains this year. I can then write new calls say Apr 2001 and if these get assigned my overall gain will LONG TERM CAPITAL GAINS. If you think about it one has rolled short term gains into long term gains, reduced taxes dramatically and also reduced risk. I think the field of options is very complicated and simplistic spreadsheets or black/scholes pricing analysis don't do it justice. regards, Kash

To: Dinesh who wrote (107942)	4/26/2000 2:23:00 PM
From: Petz	Read Replies (2) \| Respond to of 1574509

Dinesh, comment on Black Scholes -- Basically Black Scholes assumes that stocks vary with a random walk pattern with no bias to either upside or downside. If a stock truly has a bias to the upside (refered to as a positive "alpha"), then Black Scholes will 1. say that call options are less valuable than they really are 2. say that put options are more valuable than they really are 3. say that short term calls are too valuable compared to long term calls The third point comes about because the average change in stock price based on random walk theory is proportional to the square root of the number of days of movement. But, for a stock with a positive "alpha" (an uptrend), the average change in stock price is at least linear with time, and more accurately its exponentially growing with time. Therefore, since option pricing on the exchanges does not veer much from Black Scholes, a good strategy -- for a stock with a positive alpha and very high volatility -- is to buy longer term calls and sell shorter term calls. Spreads can get messy to handle with your broker and the commisions double, so they are not for everybody. BTW, strike prices up to 120 for May, June, July etc were added today. Petz