What is Implied Volatility and How Can it Help Me?

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.

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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!

Dan Sheridan


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