Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Dave Triplett who wrote (6287)	1/5/1998 1:46:00 AM
From: Greg Higgins	Read Replies (2) \| Respond to of 14162

Dave Triplett writes: what is the math relationship between the Jan 10 bid (2 5/16) and ask (2 1/2) of today and that of a different price tomorrow. For instance if IOM should go from 12 3/8 to 12 3/4 tomorrow who or how is the new bid and ask figured out on the new stock price? Bids and asks per tick in the stock are generally figured out (within a range) the night before. From McMillan: Theorectical call price = xN(d1) - se(-rt)N(d2) where d1 = [ln(x/s) + (r + 1/2v2)t]/[vt(1/2)] and d2 = d1 - vt(1/2) ln is the natural log function N() is the cumulative normal density function v is annual volatility x is the current stock price s is the strike price r is the interest rate (annual) t is the time to expiration in years is the exponentiation operation Volatility is computed using v = [Sum_i=1_to_n (Xi-Xbar)2/(n-1)]*1/2 where Xi = ln(Pi/Pi-1), Pi being the closing price on day i and Xbar is the average of the Xi over n days. Once computed, v260**(1/2) is annual volatility. This is called the Black Scholes Model (or formula) and is generally valid on european style options on a stock paying no dividends. For your example, however, you can assume that an in the money call will always have an ask >= S-K where S is the current stock price and K is the strike price. If the ask is very close to S-K, then one one the following is true: the option expires shortly or the option is likely to be exercised early. For out of the money calls, pricing is much more difficult, mainly because a market maker can manipulate the bid / ask to achieve any desired result. Besides McMillan, Cox & Rubenstein and Rajna Gibson are all sources of information about option pricing models.