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Technology Stocks : Loral Space & Communications -- Ignore unavailable to you. Want to Upgrade?

To: dougjn who wrote (3120)	5/19/1998 10:39:00 PM
From: Fernando Saldanha	Read Replies (2) \| Respond to of 10852

You have to look at a book in options theory and program the Black-Scholes formula in a spreadsheet. Alternatively, there are some options calculators on the web. The B-S formula takes the following inputs: the stock price, the strike price, the time to expiration, the interest rate, and the stock volatility. All except the last are observable (an approximation for the interest rate is OK, since the result is not very sensitive to your interest rate assumption). Given these inputs the B-S formula gives you the theoretical price of the option. But you know the option price, so what you do is to solve for the volatility that gives that price as the theoretical value. That volatility is called the "implied volatility." Now you compare that with your expectations for the volatility until the expiration date. You may estimate this future volatility by assuming it will be the same as the stock's recent volatility, say, the volatility in the last six months. If the implied volatility is higher than your expected volatility the option is expensive, otherwise it's cheap. Good luck.