AAPL is at $155 today. The at-the-money 31 Day Call in the June 16 Expiration is trading at $3.30 with an Implied Volatility of 17.41.
What is Implied Volatility?
In the above example, the market price is $3.30. The 17.41 Implied Volatility is the input you put in the Options Pricing pricing model that spits out the market price of $3.30.
If I put in 15 into my pricing model, it might spit out a price of $2.00. That wouldn’t be the Implied Volatility. Remember, Implied Volatility is the input you put in the pricing model that equals the current market price.
How can knowing Implied Volatility help me?
Now that I have the implied volatility number as a metric of the current option price, if I can compare the number to Historical numbers , it will mean something useful. The Historical Implied Volatility Range in AAPL over the last year is around 11-29. Now having some Historical perspective, historically, I can see 17 is in the lower end of the range.
A Practical application is this:
If I am bullish , buying a Call at around 17 volatility isn’t a bad buy from a Volatility perspective. Analogy: It’s like buying a pint of raspberries at Grocer for $7. I come home and ask my wife if it was a good buy. She grimaces! She says” The range over the last year for a pint of Raspberries is $2- $7. I paid the top!
When VIX is at 10 and SPX is near all time highs, I like Call out-of-the-money Back spreads . Here is the trade in SPX at the $2390 price: Buy 2 June 19 2450 Call and Sell 1 June 19 2420 Calls for $3.40 Credit.
Position Greeks: Deltas -3 Gamma .21 Theta -4.70 Vega 71. Total Risk or Margin $2600. Total potential Yield if SPX under 2420 at Expiration in 38 Days is 14% ( credit divided by Risk or Margin).
Vega and Time Decay Risk
Because of the Vega and Time Decay Risk, would only stay in this trade till next Thursday or Friday. Looking for about 6% profit on risk of $ 2420 or about $145. Just executed this trade live at 2:11 pm central time on Friday ( today) May 12. Watch Blog next week for updates on this trade.
With the volatility in a lower range, I like the possibilities of an SPX weekly calendar today. I am looking at the trade below:
Sell 1 SPX May 19 2390 put
Buy 1 SPX Jun 2 2390 put
Debit for spread is approx. $7.25 with SPX trading at 2390
Total cost per spread at this level would be $725 plus commissions. Looking to close trade at a 10% gain or 10% loss.
If you get filled at $7.25 immediately place good to cancel order to sell at a profit at $8.05. Close trade at a loss if you are down $80 on the spread.