Option Valuation Model
by Steve Barr
Radix Research Limited
1652 Mount Batten Pl.
Victoria, B.C., Canada V8S 5J9
Product: Stock options evaluation program.
Price: $250 Canadian.
Equipment: IBM PC/XT/AT
Have you ever bought a cheap out-of-the-money call, say for 10 cents and watched it tank, slowly, so
slowly, until it was worth nothing? Sure, the initial logic (you did use logic didn't you?) said that 10 cents
for the contract was "all" you could lose. But that turned out to be the entire capital invested: 100% down
the drain. Was that contract so cheap? I started playing the options market that way, sometimes doubling
my investment, and just as often giving back a substantial amount on the next trade.
How would you like to be able to evaluate option premiums in a more objective manner? You better
believe the floor specialists use more than a guessing game! On-floor computers keep them informed of
how any given change in the underlying security price will change the value of the different option strike
prices and expiry dates.
By using an accepted options evaluation formula you will, although not guaranteed profits, be able to tilt
the odds more in your favor, by knowing more about how the floor traders at the center of the action are