Making Money With Option Volatility Pricing
Anyone who is interested in options trading is very much familiar with the Black-Scholes model.
This model has been the system used in options pricing, wherein a number of variables are considered to calculate the so called FMV (fair market value) of any given option.
On the other hand, many options traders rarely consider the market value of options before making a move.
Sometimes, emotions tend to control an investor that he hastily buys or sells his options without ever considering other known factors such as option volatility pricing.
Primarily, not all traders know the truth behind underlying asset prices.
In the end, they soon realize that when price changes, there is a possibility that the option's value would decrease.
This concept can be further understood through studying option volatility pricing.
As a trader, part of your decision-making skills should include careful assessments.
Movements in underlying stocks must be evaluated to further gain advantage.
With this, it is crucial to understand how volatility affects option pricing and how can you maximize relative opportunities.
The concept of volatility refers to the measure of rate and impact of price changes concerning the underlying asset.
Once volatility is high, it is likely that the premiums on options will be relatively high as well.
The same impact can also be assumed if volatility is lower.
The importance of studying and knowing this matter is to enable an investor to keep track of movements in prices.
However, making money with Option volatility pricing has other relative concepts such as options mispricing.
This usually happens when the model's fair market value does not coincide with the actual market value.
So how do we make money? What benefits are we supposed to get if the model's price is different from the actual price of options? The answer lies in the amount of implied volatility (IV).
Be reminded that option models determine implied volatility using current market prices.
Example: If an option should be three points in premium price and the current market price indicates four, the additional one point-premium is attributed to Implied Volatility pricing.
In short, volatility is determined using the current market's price, which is normally an average of the two nearest OTM (out of the money) option strike prices.
To sum it up, option volatility pricing will help users to measure the impact of price movements (Statistical Volatility/SV) as well as expected price changes (Implied Volatility/IV).
If volatility is high, it is best to sell options rather than go for straight options buying.
Low volatility, on the contrary, may offer better prices to buyers but the possibility of staying too long in trading is far more apparent.
As a result, using option volatility pricing will help traders in their decision-making, therefore having an upper hand as compared to their rivals in options trading.
This model has been the system used in options pricing, wherein a number of variables are considered to calculate the so called FMV (fair market value) of any given option.
On the other hand, many options traders rarely consider the market value of options before making a move.
Sometimes, emotions tend to control an investor that he hastily buys or sells his options without ever considering other known factors such as option volatility pricing.
Primarily, not all traders know the truth behind underlying asset prices.
In the end, they soon realize that when price changes, there is a possibility that the option's value would decrease.
This concept can be further understood through studying option volatility pricing.
As a trader, part of your decision-making skills should include careful assessments.
Movements in underlying stocks must be evaluated to further gain advantage.
With this, it is crucial to understand how volatility affects option pricing and how can you maximize relative opportunities.
The concept of volatility refers to the measure of rate and impact of price changes concerning the underlying asset.
Once volatility is high, it is likely that the premiums on options will be relatively high as well.
The same impact can also be assumed if volatility is lower.
The importance of studying and knowing this matter is to enable an investor to keep track of movements in prices.
However, making money with Option volatility pricing has other relative concepts such as options mispricing.
This usually happens when the model's fair market value does not coincide with the actual market value.
So how do we make money? What benefits are we supposed to get if the model's price is different from the actual price of options? The answer lies in the amount of implied volatility (IV).
Be reminded that option models determine implied volatility using current market prices.
Example: If an option should be three points in premium price and the current market price indicates four, the additional one point-premium is attributed to Implied Volatility pricing.
In short, volatility is determined using the current market's price, which is normally an average of the two nearest OTM (out of the money) option strike prices.
To sum it up, option volatility pricing will help users to measure the impact of price movements (Statistical Volatility/SV) as well as expected price changes (Implied Volatility/IV).
If volatility is high, it is best to sell options rather than go for straight options buying.
Low volatility, on the contrary, may offer better prices to buyers but the possibility of staying too long in trading is far more apparent.
As a result, using option volatility pricing will help traders in their decision-making, therefore having an upper hand as compared to their rivals in options trading.