Options Volatility – Implied Volatility in Options Part 7
Options Volatility – Implied Volatility in Options (Part 7)
Key points to take away and this is all simple to understand just nice to be aware of it. Historic volatility is where the stock has been. It’s got its place. It has its relevance. You want to know if you’re going to try and predict and I’m looking at the one-month option. What’s the stock going to do over the next month? It’s nice to know what it’s done over the last month, or the last two months or three months, but that’s it. It’s got its place, but it has its limitations. Implied volatility is specific to options.
You’ll only find it in the option itself, and it’s the markets expectation of what the stock price is going to move between today and expectation date, and that number is expressed on an annualized basis. You can back out the numbers, we did earlier to get yourself the range and do the math. You know, one week one month out just do the math by de-annualizing that number for the timeframe that you’re looking for and that may give you a range that’s more useful to you. Then the two the two strategies that are the bread and butter of volatility trading – they both involve calls and puts.
Which means they don’t have a directional bias, buying them both or selling them both. And of course, when it comes to selling them many of you probably aren’t going to be selling strangles or straddles because of the risk profile associated with that. But if you wanted to take advantage of the concept of selling straddles and strangles instead of just dismissing the idea, selling a straddle would accomplish the same thing. If you sold an Iron Butterfly, which simply means you’re selling and at the money straddle and then you’re buying a call and buying a put at further out strike price, as far out as you want to go to protect the risk.
It’s a very viable trade and same thing with selling a strangle, and I didn’t go through the Iron Condor here, but because the strangle is the direct entry to volatility, but many of you are not going to sell a strangle because of the volatility. Not just because the volatility because of the upside exposure and the downside exposure associated with that.
It’s just might be too great for you. But an Iron Condor accomplishes the same thing as the Iron Butterfly does, your selling the call and put and then going out further on both ends, high on the call side low on the put side and buying options to protect. So same deal, taking advantage hopefully of a decrease in volatility where the stock price movement did not overcompensate for that decrease. And that’s what selling the straddles and the strangles is all about.