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.

Gold/Mining/Energy : Crystallex (KRY) -- Ignore unavailable to you. Want to Upgrade?

To: E. Charters who wrote (8549)	5/7/1998 9:08:00 AM
From: E. Charters	Read Replies (1) \| Respond to of 10836

Black and Scholes with Merton's help came up with an option pricing formula by constructing a hypothetical portfolio in which a change of price in a stock was canceled by an offsetting change in value of the options on the stock - a strategy called hedging. Here is a more simplified example: a put option would give the owner the right to sell a stock for three months if the stock price is at or below $100.The value of the option might increase by 50 cents when the stock goes down $1.(because the condition under which the option can be used has grown more likely and decrease by 50 cents when the stock goes up one dollar. To hedge against risk in changes in share price the the investor can buy two options for every share he owns; the profit then will counter the loss. Hedging creates a risk free portfolio, one whose return is the same as that of a treasury bill. As the share price changes over time the investor must alter the composition of the portfolio - the ratio of the number of shares of stocks to the number of options - to ensure the holdings remain without risk. The market cause the price of the riskier stock to trade further below its expected future value than the more staid equity, and that difference serves as a discount for inherent riskiness. To hedge against pure volatility in a stock which can swing either way the investor may buy both a put and a call on the same stock. If volatility is guaranteed then the profits on either substantial swing in stock price will more than offset the loss on the opposing derivative. This technique of investment is called a straddle. In order to calculate the volatility - likelihood a survey of the standard deviation of the last year's price would be required. In addition the deviation over time could be also calculated for a group of say 30, 3 month periods as well and that index taken to give a figure of the likelihood of this loss/gain pattern being obtained. If for instance the standard deviation of a 30 dollar stock for one year was 5 dollars and the standard deviation of the 30, 3 month periods in that same year was also 5 dollars then it almost assured that a $1.65 option has 3 times leverage in the market. echarter@vianet.on.ca The Canadian Mining Newsletter