Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 327

implied volatility of eight OEX (S&P 100) index calls and puts with average maturity of 30 days based on real-time OEX data. Based on this index, traders can make decisions on individual index options and determine whether they are under- or over-valued. Of course there are formulas used for determining options' premiums based on volatility and other factors, but most are complex, and in the age of computers it is rarely necessary to get involved with them manually.

If all this volatility stuff has you to the point of throwing in the towel, wait. Average investors like you and me can't be expected to go through complex calculation to figure out expected volatility and premiums. Fortunately many brokers, realizing this fact, provide their customers with just that: the Black-Scholes value. The Black-Scholes value is the theoretical premium of an option based on the Black-Scholes model (named after its inventors) which takes into account many pieces of data including the price volatility of the underlying stock. One could then use the Black-Scholes values as a comparison to the actual premium values of the same options in order to determine the relative costliness of those options. Some brokers may also provide another piece of data known as leverage, which indicates the percentage of loss or profit made in an option if one were to trade in and out of that option within one or two days and the stock moves up by one point in a favorable direction during that time.

There is certainly a bevy of technical analyses for options, and the data can be found in many ways. Some may come in the form of software, others may be available to you on the Web, and yet others may come to you in the form of newsletters you subscribe to. We only covered an extremely basic technical analysis here. Always keep in mind that various technical analyses, no matter how valid they claim to be, are only forecasts. There are no guarantees. I can assure you there are many of them out there with no real foundation. They exist for one


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