A few questions, as I'm trying to get more of an understanding of this topic.

1. What method do you use to work out option values? I don't have the Hoadley Excel thing (although have tried the free calculators on the Website), but I gather it includes the Black-Scholes, Binomial, and one or two other formula. If you primarily just use the Black-Scholes method, how do you allow for dividends and the possibility of early exercise on American-style options, or do you find they don't make much difference?

2. How do you know if this formula is giving valid results? It seems to me that there are essentially two unknowns in the formula: option value and IV, and that by fiddling with IV you can always get the option value to match the current market price. Consequently, if the underlying price changes and when you plug that into the formula it gives a value other than the current market price, do you assume that's just because the IV must have changed or that possibly the model the formula is based on is not accurate? The texts I've read all note that prices don't always match the lognormal distribution assumed by Black-Scholes, and that there can be different degrees of skew and kurtosis (that I can plot in AmiBroker), which implies that the formula won't always give accurate results. But does it really matter for practical purposes?

3. Is it possible to get historic IV information for ASX stocks? I've seen some of you talking about IV plots, as opposed to simple SV plots which I can do in AmiBroker, and wonder where you get the data from - especially for the Australian market. And is the IV data for the share or the derivative, as I've noticed different derivatives on the same share can show different IV values (although generally not much different)?

4. When calculating IV, I gather the general method is to work backwards using the current market price as an input. How then do the MMs come up with a figure when they may be the whole market for a particular warrant (and presumably option) for much of the time? In other words, when I look at a warrant and see a particular bid/offer spread from an MM, and no other bids or offers (and quite possibly no trades ever for that instrument), how are the MMs coming up with an IV value so as to set a price? When I compare most back-calculated IV values with current SV values of the underlying in AmiBroker, they are invariably higher - no matter what SV time frame I use. What other information might an MM be using to determine a higher IV?

Thanks.

GP

## Bookmarks