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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe -- Ignore unavailable to you. Want to Upgrade?

To: Dominick who wrote (780)	2/25/2003 12:28:18 AM
From: tyc:>	Respond to of 1064

>>Now I'll wait for Dan to fire a burst in my fuselage. I think perhaps Dan has given up on both of us, Dominick ! Can't say I blame him ! Anyway, I think I now understand ! When we input a volatility figure into the Black Scholes calculator, the BS program treats it as the volatility of percentage price changes. It's no use inputting the volatility of closing prices if the BS model is going to treat is as something different. We must use Dan's HV because that's what BS expects and that's what's consistent with IV. I hope that's right ! It has been fun ! Seeya !

To: Dominick who wrote (780)	2/25/2003 1:05:00 PM
From: tyc:>	Read Replies (1) \| Respond to of 1064

To illustrate my new understandings; During the past 50 days, AGE.to has traded in a range of prices that might have been expected if the Historic Volatility had been 22%. During that same 50 days, the historic volatility, as calculated from daily percentage price changes, was actually ` 50%. As I write, the Price of AGE.to is $20.16, and the Jun 22 call is bid $1.80. This reflects an IMPLIED volatility of 50.3%, which is very close to HV. The delta of the call is .46, so long 100 shares short 2 calls, would give you close to a perfect hedge. The 2 standard deviation profit range extends from $15.00 to $27.12. Check this range on the chart, comparing it with the range in which the stock has traded during the past 50 days (BB's). stockcharts.com (Above $27.12 one would be exposed on the upside to a 100 share short position. Is this within one's risk tolerance). Actual dollar and annualised percentage profit at expiry (as calculated by my dubious home-made basic program are); $15.. break even (the value of the 100 shares equals the amount paid for the position). $17... a profit of $123, which is an annualised return of 24% on the amount paid for the position. $23... this closing price is $1 above the strike so you will be short (replace position by selling two puts). Nevertheless profit here is $476, an annualised return of 95% $27... getting close to the upside break-even, nevertheless profit is still $76 an annualised return of 15%. Our discussion of volatilities has been of practical value to me. I thank you,Dom, Dan and OX.