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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: VincentTH who wrote (6663)	2/6/1998 3:57:00 PM
From: Douglas Webb	Read Replies (1) \| Respond to of 14162

My primary use of it would be to help me set limit price for orders before I set off for work everyday. Say, I think that a stock is to go down $2 from $30 today, (based on my novice TA skills), and the $30 call was at $2 the previous day close, what target price should I use should the stock drop to $28? If only it were that easy. The Black Scholes model is not going to be much help to you in predicting price limits. Unless the option is near expiration, or deep in-the-money, the driving factor in it's price is the stock's volatility, and this is tough to predict with any accuracy. You can take the current stock and premium prices and calculate an implied volatility, then use that to calculate a new premium for a different stock price, but the volatility will probably change as the stock price changes. How much it will change, and what effect this will have on the premium, is unknown. What you can do is this: plug your stock into webbindustries.com and lookup the option you're considering. The 'delta' column will give you an approximation of how much the premium will change if the stock price changes by $1. (The larger and faster the stock price change, the less accurate the delta becomes. It's also much less accurate near the strike price, if the stock price crosses the strike.) What I generally do is look at the current time value and intrinsic value of the option I'm interested in, and figure out how those might change for a given stock price change. Then I look for an option for the same month which is close to where I think the new values might be, and see what it's premium is. That gives me an idea of how much my option's premium might change. I use this for rough calculations and planning, but I would never set a limit order based on this analysis. Doug.