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Old 11-09-2006, 08:06 AM
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Re: Let's talk about options

Hey Torero,

The Black Scholes model is used to figure out if your option is fairly priced. Say you have the strike you're looking at, the share price of the underlying, the time till expiry and the volatility of the option. Then, with the results, you can see if the option is overpriced, or fairly priced. It's very helpful, but I think a lof of softwares should have a "theoretical price" built in so you can see it without having to do the calculations yourself. So, yes, it's absolutely useful and essential to know if you're overpaying for an option. Now...if you're selling the option, which is what I usually do, then you want it to be overpriced.

For what I trade, index options only. They're treated like commodities by the tax man, which gives me some nice tax benefits, plus I don't have to worry about huge fluctuations because of earnings or scandal.

There are also volatility models that can help you figure out the probability percentage of an option expiring in the money or not. Those are somewhat useful, in that the market *usually* has a fairly normal pattern to things. October was a HUGE exception and I know a lot of options traders (myself included) who had their worst month ever selling options as we expected Oct to be a flat to down month, not the roaring month it was. So...probability analysis can work....most of the time.

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