I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Saturday, October 6, 2007

How To Determine If An Option Is Cheap (Underpriced) Or Expensive (Overpriced) – Part 2

Go back to Part 1.

How To Determine If IV is High or Low? (Cont’d)


Picture courtesy of: ivolatility.com

For AAPL, the IV figures (gold colored line) range between 24% to 54%.
The peaks / highs of the IV charts are around 45% - 55%. When the IV is relatively high for the stock, that means the option’s price is relatively expensive.
On the other hand, the bottoms / lows of the IV charts are about 25% - 30%. When the IV is relatively low for the stock, that means the option’s price is relatively cheap.
The area between 35% - 40% seems like the average area. Hence, when IV is around this area, the option’s price can be considered quite “reasonable”, not “expensive” or “cheap”.
Notice that when the IV is at the peak or at the bottom, it tends to move back towards its average area.

Implied Volatility (IV) & Options Strategy Consideration
When IV is relatively low (option is cheap) and is expected to rise, buy options (i.e. consider options strategies to take advantage of the expected move that allow us to be an option buyer).
For example:
You expect the price to go up in the near term. Currently, the IV is also relatively low and it’s expected to increase, as it is approaching earnings announcement in a few weeks ahead. When you buy Call options, the option’s price could increase not only due to the rising stock price, but also as a result of the rising IV. Even when the price stays flat, the option’s price might still increase due to the increase in IV.
Buying Straddle or Strangle also can benefit from the rising IV.

When IV is relatively high (option is expensive) and is expected to drop, sell options (i.e. consider options strategies to take advantage of the expected move that allow us to be an option seller).
For example:
When you’re bullish, you may want to consider a Bull Put Spread, which allow you to sell options (and collect premiums) with a limited risk.
On the other hand, when you’re bearish, you can consider a Bear Call Spread.

To understand more about other aspects of Implied Volatility, go to: Understanding Implied Volatility (IV).

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Option Greeks
* Learning Candlestick Charts
* Learning Charts Patterns
* Getting Started Trading


Blaine561 said...

If you are going to survive in these boisterious times then you have to learn how to beat the system at its own game. I found a great website for learning to trade options and just found out they will soon be offering Forex courses as well. You can see the new website, still under construction, and get a feel for what they do at http://www.optionsuniversity.com

Tony Chai said...

Hi OTB :

For a volatile stock like Apple (AAPL), your options trading buyying or selling strategies must factor in a 4-5% price gapping movement after earnings announcement.

Traders must also take note of the price movement 2 to 3 days before the earnings announcement. It's not uncommon for AAPL to have made the 4-5% movement (in either direction) BEFORE earnings announcement.

Yours Truly,

Tony Chai


Hi Tony,

Thanks again for your great input.
I believe the readers will benefit too from the experiences you shared here.

Appreacite it.


Tony Chai said...

Hi OTB :

You are also doing a great deed by taking the trouble to create these options trading related topics to guide beginners.

Although they can find these topics in other web-site, they might not be collectively be available in one web-site and they might not be as clearly organized into more easily digestible chapters like what you've done here.

Just don't stop what you're doing :)

Yours Truly,

Tony Chai
My Options Trading Blog


Many thanks for the kind words, Tony! :)

I'm glad if you find this blog is useful. Actually, I'm not an expert myself. I still have so much things to learn. Here I'm only sharing what I have learnt, so that other people who are interested in learning options trading can benefit from it too. In fact, I also learn a lot from you. Thanks for all your great inputs. :)

As fellow blogger, you also know it's not easy to blog. It really takes time to prepare / write a post. But with the support & encouragement from all of you, I'll certainly not stop doing this. I really feel very happy if many people can benefit from this simple blog. :)

Best Regards,

vhopt said...

Thank you very much for the most concise and simplest option intro. Highly recommended