← AdvancedLesson 7 · 4:01
Low VIX or high VIX: is the option cheap or just quiet?
Summary
You can separate cheap in dollars from cheap against what comes when you read a VIX level. You can describe what a low or high level does to an option's premium, its daily theta and its expected move, and explain why neither level is a signal on its own.
Key terms
- theta
- How much an option loses in one day with nothing else changing.
- expected move
- A rough guide to the size of move an option price assumes, read from the at-the-money call and put added together.
Check yourself
Answer each question to see why the right answer is right.
1. A 20 delta XYZ put pays $34 at 12% volatility and $109 at 35%. Why does the high level pay so much more?
2. With the stock standing still, which level melts the premium fastest for a seller at the start?
3. A seller collected $34 on the 12% put. Volatility then jumps to 35% with XYZ still at $100. What does the put cost to buy back?
4. Grouped by level, the VIX was higher than what came on 83 to 87 days in every 100 at every level. What does that say about a low VIX?
5. Is a high VIX a signal to sell, because the premium is bigger and the gap is widest?
Finished the video and the quiz? .