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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: alanrs who wrote (1380)	7/10/2001 2:12:45 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

ARS My question about the .14/day is that the option actually traded between 2.50 and 3.10, closing at 2.50. This was down .30. At the close the stock was up .50, so some of this price appreciation in the stock should be reflected in upward pressure on the option. My assumption was that the option had lost .30 plus whatever upward effect of the stock price, and that this was all time premium decay. Is there another factor that I'm missing that the options formulas consider, or is option pricing often out of line with theoretical values? The options formulas take into account the historical volatility of the stock, time to expiration, etc. Any time the price action of the stock deviates from the historical norm, option prices will deviate from the theoretical predictions. The theory cannot account for the mood of the day and the liquidity that drives the price action on a small time scale. Bid/ask spreads tend to get larger when a stock moves rapidly, and some people still don't always get the "best price" because the exchanges are not yet compelled to direct orders to or match the price of the best quote (it's supposed to be coming soon), so there can be rather large price differences from one print to the next. The formulas can be worked backwards to determine the "implied volatility" for every option price, and that number is often quite different from the historical value. On top of the potentially wide variation from one print to the next, the last print of the day is not always a good measure of the average option-underlying price relationship because the last option prints and stock prints are not necessarily at the same time. The last 4 prints on Friday were 2.80, 2.30, 2.75, 2.30, all at 3:57 with the stock at 43.10 and 42.97. Yesterday they were 2.50, 2.60, 2.60, 2.60 from 3:51 to 3:55 with the stock at 43.18 and 42.96, yet the closing prices of the stock on those two days were 42.97 and 43.41. Yesterdays last option prices were not correlated with the closing stock price, and Friday's were jumping all over, though it appears from several earlier prints that 2.80 was more representative than the others. The .14/day is a reasonable average expectation as long as the stock behaves in line with it's past history. A sudden big move in SEBL could change that some, but in the 11 days left till expiration there is only 1.55 left to go, so it can't change by too much. The way SEBL is going today, the movement of the underlying is a much bigger factor in the option prices than the passing of a day. Dan