Implied Volatility Chart Training Video

I have received some questions about implied volatility and the role it plays with trade selection. I have shared with you two of the tools that I use to assess implied volatility, there are certainly others, but if you plan to trade options you will need something to help you understand where implied volatility is relative to recent historical measures.

Stock options are derivative securities. They have no value innate to themselves. All of their value is derived from other factors. Those factors, commonly referred to as the "option greeks", include the price of the underlying security, the amount of time left until the option expires, interest rates and dividend risks, and the collective expectations of the market for future price movement of the underlying security.

No one knows what the price will be in the future. However, if the consensus among market participants is that a stock is likely to move significantly, up or down, that consensus will be reflected in their willingness to pay a higher price for options on that stock. Conversely, if the market believes that future price movement will be minimal the option prices will fall lower.

What is happening is that the market participants are anticipating future price volatility. What will GOOG's price be in 30 days? I do not know, either. However, the stock price is prone to make big moves. It is a volatile stock. Option prices reflect that, and rightfully so.

We can look back in time to see what price movements a stock actually made. We can measure that historical volatility. Historical volatility is derived from the actual price movements the underlying security has made in the past. Options prices change with the market's changing expectations of future price volatility, however. Those option prices imply what the market's expectation is for future price movement. Hence, that component of an option's price is called "implied volatility."

I have made arrangements for you to view a training video for Volcone users. Ron Ianieri and Bill Johnson cover some of the theory behind option pricing and demonstrate how a volatility cone can be used to assess the relative price of an option.

Valuing Options with Implied Volatility Training Video

Volatility plays a huge role in option pricing. If you assess volatility correctly, you stand a very good chance of not losing money even if you are wrong about where price is headed. On the other hand, if you are wrong about volatility you may lose money on your trade even if you are right about the underlying price movement.

I hope you find the video helpful.

Christopher Smith
TheOptionClub.com