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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: JGoren who wrote (13502)	1/23/2001 11:47:14 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 14162

JGoren, Without going into details that I would have to look up to give a precise answer: Historical volatility is a calculated number based on price history. The calculation can be based on different time periods, but generally high volatility corresponds to large day to day changes in price. A spike like AMGN had Monday is sure to boost the short term volatility. Implied volatility is derived from a theoretical price and the actual price of the option. A standard options pricing model can be used to calculate the "fair" price based on historical volatility and the current price of the stock, time to expiration, etc. That is the calculated price you posted. Similarly using the same model with a different number for volatility can yield the actual option price. The volatility needed for the model to come up with actual price is the implied volatility. There can be good reasons for the implied volatility to suddenly drop. For example, uncertainty leading into earnings announcement creates implied volatility, as well as short term historical volatility in most cases. The option seller is incurring greater risk of a large move against him/her. The buyer must pay for that. After the announcement the uncertainty is gone, the stock quickly finds a new level that reflects the news, and the options lose a large amount of time premium because the implied volatility collapses. Dan