Author Topic: Basic Options Questions  (Read 6945 times)

compoundinglife

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Re: Basic Options Questions
« Reply #10 on: March 20, 2013, 07:25:04 AM »
Is there a way to price future option prices?

Example.

Stock is at 25.
Option strike is 30 put expires in 7 months.
Premium is 50 cents.

Now in month #2, stock goes to $29 or $30.
Expiration is now 5 months away.

Is there a way to predict the premium price of the option at this point? Is it reasonable to assume double, or could it be triple or quadruple.

Predicting the future price assuming a known price of the underlying in the future requires predicting the volatility (unless you are expiration then its easy). Search online for options pricing calculator or see if your online brokerage has one. Then play with the volatility input to get an idea.

Here is an example of the one I play with sometimes (attached as an image).
« Last Edit: March 20, 2013, 07:27:08 AM by compoundinglife »


racemize

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Re: Basic Options Questions
« Reply #11 on: March 20, 2013, 07:28:16 AM »
Is there a rule of thumb way to do this?  e.g., If I want to get a really rough model so I can play around with numbers in a spreadsheet?  Perhaps assuming a constant or close to the same volatility?

compoundinglife

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Re: Basic Options Questions
« Reply #12 on: March 20, 2013, 07:33:46 AM »
Is there a rule of thumb way to do this?  e.g., If I want to get a really rough model so I can play around with numbers in a spreadsheet?  Perhaps assuming a constant or close to the same volatility?

If you search for: options price calculator excel (or google spreadsheet) you should find some examples of how to do this. There are different pricing models you can use, I believe Black–Scholes is the most commonly used.

http://en.wikipedia.org/wiki/Valuation_of_options#Pricing_models

Sunrider

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Re: Basic Options Questions
« Reply #13 on: March 20, 2013, 11:00:05 AM »
Is there a rule of thumb way to do this?  e.g., If I want to get a really rough model so I can play around with numbers in a spreadsheet?  Perhaps assuming a constant or close to the same volatility?

The warrant spreadsheet I posted in the other thread has a blackscholes spreadsheet formula - should be fairly self-explanatory.

Cheers - C.

scorpioncapital

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Re: Basic Options Questions
« Reply #14 on: March 20, 2013, 03:56:37 PM »
I triied one of these calculators (like iVolatility) and all it did was tell me that the option call was worth 78 cents. How do I use this and all the greek letters to calculate what would be the option price in theory after 2 months if the stock price reaches the strike price with 5 more months to expiration? The reason I want to know is if the cost to buy back the call is 2x the original cost I'm ok with that but if it's more I'm not.

Sunrider

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Re: Basic Options Questions
« Reply #15 on: March 21, 2013, 04:00:01 AM »
I triied one of these calculators (like iVolatility) and all it did was tell me that the option call was worth 78 cents. How do I use this and all the greek letters to calculate what would be the option price in theory after 2 months if the stock price reaches the strike price with 5 more months to expiration? The reason I want to know is if the cost to buy back the call is 2x the original cost I'm ok with that but if it's more I'm not.

Go to one of the BAC leverage threads. I posted a sheet with calculations of the warrant prices at certain price/expiration points. Use the formula in the sheet to calculate option prices - inputs are: Stock price, strike price, interest rate, dividend yield, volatility and time to expiration. The last parameters is probably what you want to play with to simulate what happens to the price when you roll time forward. No need to do it via the Greeks and much more accurate (since the Greeks change themselves as any of the other variable change ... e.g. theta = time decay speeds up over time/with less time remaining).

Actually - on second thought - sheet attached.

C.

racemize

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Re: Basic Options Questions
« Reply #16 on: March 22, 2013, 02:57:47 PM »
What determines the strike prices on LEAPS when the are issued?  A normal distribution around the current price (but rounded to a nearest number)?