← IntermediateLesson 4 · 4:47
When is an option expensive?
Summary
You can read an option's price tag, implied volatility, instead of its dollars, and judge whether that tag is high or low. You can compare it with how much the stock really moves, place it in its own past year with rank and percentile, and see what a high tag can cost you if it falls.
Key terms
- implied volatility
- The swing size an option's price assumes; an estimate, not a promise.
- realized volatility
- How much a stock actually moved, measured from its daily moves as a yearly percentage.
- implied volatility rank
- How far today's implied volatility sits between its lowest and highest of the past year, as a percentage.
- implied volatility percentile
- The share of the past year's days on which implied volatility was lower than today.
- vega
- How much an option's price moves when implied volatility changes by one point.
Check yourself
Answer each question to see why the right answer is right.
1. XYZ's 90 day $100 call costs $6 with a 30% tag. ABC's 30 day $100 call costs $5.16 with a 45% tag. Both stocks are at $100. Which option is more expensive?
2. What is realized volatility?
3. You pay a 30% tag for a XYZ call. Over the next 30 days, XYZ moves calmly, with realized volatility of 15%. What does that mean for you?
4. In the example year, XYZ's implied volatility ranged from a low of 20% to a high of 60%, and today it is 30%. What is the implied volatility rank?
5. In the same year, the rank is 25% but the percentile is 82%. Why do they disagree?
Finished the video and the quiz? .