 
FAQ 1. Installationrelated questions.
FAQ 2. Questions about using the calculator.
FAQ 3. General optionsrelated questions. (coming later).

FAQ 1. Installationrelated questions.
When will the calculator be released? 
Version 1.0 was released March 12, 2002. If you
have previously registered, you should have already received download
information. If not, please contact us. The current release is Version 1.1 
When I run the program, I get a ".dll" error? 
The download comes with 4 files, including one
which ends in .dll. This error may mean that you have not extracted
all 4 files into a single directory. If this is not your problem, contact
support. 
 FAQ 2. Questions about using the calculator.

I would like to implement a coveredcall writing strategy. How
can I use your software to identify which calls on the equities I own
will give me the best return? 
Here's one suggestion. Try to fit parameters for the
SVJ (Stochastic volatility + jumps) model for the options on a
particular stock that you own. To do this, try to imitate the procedures
in the tutorial for the S&P500 example found under "II.3 Working with
the Calculator". You might want to start with
those S&P500 parameters and make adjustments from there. (This is not
necessarily easy and may take a while).
Then, once you have some reasonable parameters, look for particular call
options whose bids are at least equal to or higher than the model
prices.
Of course, all else equal, the total position (stock + options) will
tend to have an expected return commensurate with its risk. That is, the
expected return will be higher if the options are outofthemoney vs.
selling an inthemoney position. 
What parameters should be entered in
case the average absolute value jump is around 5%, but negative
and positive jumps mostly compensate each other giving an average of
around 0 ? 
You enter
(1) for the jump volatility: sigJ = (0.05) Sqrt[Pi/2], which is
approx. 0.063.
(2)for the mean jump: muJ = (1/2) sigJ^2 , which is approx. 0.002
The reason the mean jump muJ parameter is not exactly zero is
explained in the tutorial at page 11 (Converting logarithmic jump sizes
to percentage jump sizes). These entries will show a percentage jump
size of zero in the status bar (lower right).
For some other absolute value jump, replace the 0.05 term above
by the other absolute value. These formulas are obtained by standard
calculations with the normal distribution.

Is there a clear definition of a
jump? (after all, the prices move by "ticks", so it seems that any (non
minimal?) move can be considered a jump). 
You're right  with real price data, there is an ambiguity in
deciding what's a jump. (With the underlying theoretical models, it's
clear: jumps are discontinuous moves). This ambiguity is inescapable,
but our suggestion is to concentrate on the jumps that represent, large,
infrequent moves over a short time.
For example, with a very lengthy historical
data set of, say daily prices on stock, you might want to define a jump
as any move greater than 10% or, perhaps any move greater than 5 times
the historical daily standard deviation. 
I am exploring two different jump
models with the calculator, one with 4 jumps per year with a mean jump
of zero and jump vol. of 0.05, the other with 2 jumps per year with a
mean jump of zero and jump vol. of 0.10. They seem to give very
different option values. Is this right? 
When exploring different jump models on a particular stock, it's
important to keep the "Total longrun volatility" constant. This
quantity is explained on p. 11 of the tutorial and displayed in the
status bar (lower right of the calculator). To keep this value constant,
adjust the first stochastic volatility parameter (sigL). Doing that, you
will find that these two jump models are not too much different in terms
of their option fair values. 
Will you please clarify the use of the "Half Life Parm"
parameter? The help document say it relates to the time it takes for the
volatility to drift to its longterm value. Is the initial volatility
(from which the volatility tends to drift towards its long term value)
some theoretical volatility, or is it the current volatility? And if
it's the current volatility, then what should be entered if the current
volatility happens to equal the long term volatility? 
The initial volatility is the current volatility (the entry at the
end of the first row of parameters).
The halflife parameter still has an effect, although it's a smaller
one, when the current volatility
equals the longterm volatility. That's because the calculator models
account for the fact that, in between now and the option expiration, the
current volatility will change.
There are statistical methods that can help with parameter
estimation. One of them is a general class of methods called GARCH, that
can start with a long data series of daily prices on a stock and then
estimate the (historical) halflife parameter, among other parameters.
OptionCity may provide some tools for this, later on.
Even with an advanced statistical tool, such as GARCH,
the halflife parameter can be a difficult
parameter to estimate. Values of 3 to 12 are typical, corresponding to
halflives of 1/3 year = (4 months)
and 1/12 year (= 1 month). Another complication is that the
riskaversion of investors typically shifts this parameter to a lower
number than the statistical one (thereby raising the values and implied
volatilities of longerdated options).
We use 4 for the default value, corresponding to a halflife
of 1/4 year (= 3 months), which is the quarterly earnings cycle.
Intuitively, you are trying to answer the question: "if the volatility
unexpectedly jumps way up or down", how long will it take to get
(halfway)
back to normal? This question makes sense even when today's volatility
equals the longterm volatility. For a given stock, the answer may involve a lot of judgment.
For the S&P 500 index, take a look
at
the volatility chart to get a very rough sense of meanreversion of
volatility.


