Volatility And Options Pricing

The last 30 days of an option

Is when time value becomes more noticeable. For example, if you compare owning a February option contract with one that expires in March or April, you will see that the February option loses value more rapidly.

If a stock moves no more than 2 or 3 percent within six months for a year

It has a low historical volatility.

Buying volatility

Means to buy a market neutral option position based on the implied volatility of the options and not based on predicting directions.

The option price is based on a number of factors.

Remember that some of the premium represents intrinsic value, some is time value, and some of that time value is based on the volatility of the underlying stock.

When the stock is very volatile

The call buyer will pay more for its options, knowing that there is a good chance the option will reach the strike price (and beyond) before expiration.

Volatility crush

The deflation of option premium after an expected event

Another way to think of implied volatility is

The feeling of urgency that traders have about options. Because of this urgency, you'll see higher implied volatility on options that are in the greatest demand. Lots of buying pushes option prices higher.

Standard Deviation

The measure of the dispersion of a set of data from its mean. The more spread apart data has a higher deviation.

When you look at an option price

The portion of the premium that is in the money is its intrinsic value

By comparing the historical volatility of the stock with the implied volatility of its options

You she another way of determining if the option is overpriced.

The strike price

Is one of the mjor factors that directly affect options premiums.

Option premium

Consist of two factors which are intrinsic value and time value

Volatility

Describes how much a stock changes on a day-to-day basis. How much the stock moves within a certain amount of time.

Historical volatility

Displayed as a percentage, measures how much a stock has moved on a daily basis over a certain period in the past.

Stock price minus strike price

Equals intrinsic value

A stock that moves 20 or 30 percent in year

Has a higher historical volatility

At-the-money and out-of-money options

Have no intrinsic value. They have only time value.

Volatile of the underlying stock

Is one of the mjor factors that directly affect options premiums.

Time value

Is simply what is left over after you subtract intrinsic value from the premium

Generally, buying options with extreme implied volatility

In not recommended. In fact, one way that many option traders get hurt is by overpaying for a call option on a stock that has already made a move. Even if the underlying stock continues to move higher, the option premium could collapse.

More than likely, uninformed traders heard about the positive news and loaded up on these call options, hoping for a big score.

Instead, they probably overpaid. Note that the spread between the bid and ask prices is extremely wide, which is another red flag.

Intrinsic value

Is immune to the passage of time.

Implied volatility

Is more like a real-time indicator of how much the market is willing to pay for the option.

Fifty percent or lower implied volatility

Is more reasonable based on history, while 100 percent is rather high.

A change in the price of the underlying stock

Is one of the mjor factors that directly affect options premiums.

Dividends

Is one of the mjor factors that directly affect options premiums.

How much time is left until expiration

Is one of the mjor factors that directly affect options premiums.

Interest rates

Is one of the mjor factors that directly affect options premiums.

The option type: call or put

Is one of the mjor factors that directly affect options premiums.

Options are wasting assets

The rate at which they lose time value is not linear (I.e., not a fixed amount everyday). Instead, the rate of time decay increases each day until it disappears altogether.

You could also explain implied volatility with complicated formulas

Using standard deviation.

Option prices are higher

When the underlying stock is more volatile