Saturday, November 24, 2012



The most valuable item in options pricing next to price movement. This  normally does not get much time in the importance of knowing what the implied volatility is for the underlying (Stock). This value in pricing models will be half the reason the premium is higher or lower than normal. Volatility is a way to seek a peek into how the option is priced at current day and  can be a way to judge if a options premium is relatively cheap or expensive.

Depending on what the stock price is doing and how many or how big the price changes are will determine its volatility.

     Example: if the price is moving around a lot in a large range it will have a
      high volatility value    (IV of 85%).

     Example: if the price is not moving very much then the it will have a
      low volatility value (IV of 20%)

There can be a long discussion on this. However in all the books, websites, and people talking about volatility there is one thing you must keep in mind, "what will Volatility mean for my upcoming position?" By this I mean is it "Low" or "High"

 IV= Implied Volatility what the future/ forested volatility is supposed to be.
HV= Historical Volatility what the volatility has been.

the one we always see is IV & HV, we can easily get these two values. People like to compare IV to HV to see if something is Cheap or Expensive? Be careful the options price is based on the IV.


The most important thing is in any price weather it be an option or stock is where the price is going, you cant go back in time. Once a event has happened its over. so to me the IV (Implied Volatility) is the thing to watch and compare. IV is also what the options premium is based one.

Example: a 82% IV where the average IV for a particular stock would normally be 60%, the 82% would be inflated option premium.


The bigger lesson is which direction will the IV go? Can it go higher or can it go lower? We like to use the HV as a mean, the thought is the IV if high will revert back to its mean. When it starts to fall it will accelerate.

What does this mean before or during a trade?
1. If you buy a Call and the IV is high, chances are your option will be worth less  and it will difficult getting or staying profitable.

2. If you sell a Call and the IV is high, chances are the IV will revert to the mean or at least get lower in time. As the IV lowers the options price will deflate. When you sell an option you want the options premium to lower and hopefully be worth Zero by expiration.

The strategy choice is very important depending on what the IV is.

I like to scan the markets for Higher than normal IV's, also i like to find a very liquid market (high volume)



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