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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Barbara Barry who wrote (8935)	11/22/1997 9:19:00 AM
From: Defrocked	Read Replies (1) \| Respond to of 18056

Barbara and Bearded One, the observation that out of the money options are more expensive in terms of volatility than at the money options is more of an artifact of the Black-Scholes model rather than a condemnation. :^) The BS model "assumes" constant volatility and yet one can "see" patterns across strikes sometimes referred to as "volatility smiles" or "hockey sticks". For most traders not actively employing delta-hedging techniques B-S is still a very good relative value indicator for the derivatives other than volatility. Yes, there are already several other more advanced option pricing models that are utilized by large CBOE traders and firms who are "warehouse" volatility in their books and are relatively immune from market movements but not gaps. These traders often use a variant of the non-constant volatility model proposed by Hull and White and is discussed is their very fine and somewhat technical book on option pricing. FWIW and maybe more than you wanted to hear.<g>