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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: Qtrlytrades who wrote (5671)	10/28/1997 8:22:00 AM
From: Douglas Webb	Read Replies (2) \| Respond to of 14162

You should read Options as a Strategic Investment, by McMillan, which has chapters on covered calls and descriptions of delta, theta, and the other greeks (which I don't calculate.) Here's the too-short description: Implied volatility is the number you would plug into the Black-Scholes equation as the stock volatility in order to get an option premium which matches the real premium. It's the market's estimate of the stock's volatility, but it's not quite accurate. That's why it's different for every option. Higher volatility means higher-priced options and larger swings in the stock price. delta is the dollar amount the option price will change if the stock price changes by one dollar. It's not real useful for that, though, because if the stock price changes by one dollar the delta will change too, so the option price will change more or less than you thought. It's usefull for comparing different options, since it shows their relative responsiveness to changes in the stock price. A more responsive option will give you more opportunities to buy back a covered call. theta is the dollar amount the option price will change when you get one day closer to expiration. It represents the time-decay of the option. I've noticed that my calculation for theta seems to be very sensitive; some of the options I'm following have thetas that fluctuate 100%+ per day. I may change to a 7-day theta instead of one day to try to smooth it out. Doug.