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To: Gib Bogle who wrote (28530)	12/29/2006 4:06:02 AM
From: koan	Read Replies (1) \| Respond to of 78411

I was referring to the strategy. It involves probability and managed risk-lol.

To: Gib Bogle who wrote (28530)	12/29/2006 7:03:04 AM
From: E. Charters	Read Replies (1) \| Respond to of 78411

All the parameters of the Black Scholes model other than the volatility — that is; the time to maturity, the strike, the risk-free rate, and the current underlying price—are unequivocally observable. riskglossary.com This means there is a one-to-one relationship between the option price and the volatility. By computing the implied volatility for traded options with different strikes and maturities, we can test the Black-Scholes model. If the Black–Scholes model held, then the implied volatility for a particular stock would be the same for all strikes and maturities. In practice, the volatility surface (the three-dimensional graph of implied volatility against strike and maturity) is not flat. The typical shape of the implied volatility curve for a given maturity depends on the underlying instrument. Equities tend to have skewed curves: implied volatility is higher for low strikes, and slightly lower for high strikes. Currencies tend to have more symmetrical curves, with implied volatility lowest at-the-money, and higher volatilities in both wings. Commodities often have the reverse behaviour to equities, with higher implied volatility for higher strikes.

To: Gib Bogle who wrote (28530)	12/29/2006 7:03:04 AM
From: E. Charters	Read Replies (1) \| Respond to of 78411

Addendum: All the parameters of the Black Scholes model other than the volatility — that is; the time to maturity, the strike, the risk-free rate, and the current underlying price—are unequivocally observable. riskglossary.com BS-Calculator: blobek.com High volatility curve example: (For volatility you could estimate the average daily % change. Otherwise you have to have a history and spreadsheet calc it. The volatility of the underlying instrument can be applied with data easily available from services with dowloads of a year's noon prices and excel.) This means there is a one-to-one relationship between the option price and the volatility. By computing the implied volatility for traded options with different strikes and maturities, we can test the Black-Scholes model. If the Black–Scholes model held, then the implied volatility for a particular stock would be the same for all strikes and maturities. In practice, the volatility surface (the three-dimensional graph of implied volatility against strike and maturity) is not flat. The typical shape of the implied volatility curve for a given maturity depends on the underlying instrument. Equities tend to have skewed curves: implied volatility is higher for low strikes, and slightly lower for high strikes. Currencies tend to have more symmetrical curves, with implied volatility lowest at-the-money, and higher volatilities in both wings. Commodities often have the reverse behaviour to equities, with higher implied volatility for higher strikes.