← BeginnerLesson 11 · 5:30
What does volatility do to the price?
Summary
You can name the three things in an option's price: the stock, the clock and volatility, the size of the swings the price assumes. You can show how a rise in volatility lifts both calls and puts with the stock and clock frozen. You can explain how a call can lose money after good news when implied volatility falls.
Key terms
- volatility
- The size of the swings a stock is expected to make, written as a yearly percentage, saying how far but not which way.
- implied volatility
- The swing size an option's price assumes; an estimate, not a promise.
- earnings
- A company's announcement of how much money it made.
- drop in volatility after news
Check yourself
Answer each question to see why the right answer is right.
1. What does volatility describe?
2. XYZ is at $100 and the 30-day call with a strike of $100 costs $3.45 at 30% volatility. With the stock and the clock frozen, volatility rises to 50%. What happens?
3. The same rise from 30% to 50% volatility happens on a put with a strike of $100 costing $3.41. What happens to the put?
4. Before earnings, implied volatility is 60% and you pay $4.69 for a call with a strike of $100 and 14 days left. Next morning XYZ jumps to $103 and implied volatility falls to 30%. Where are you?
5. What is implied volatility?
Finished the video and the quiz? .