*welcome aboard*
This board is for the discussion of options pricing and volatility. Here, we hope to more carefully examine the makeup of extrinsic value within a given contract, composed namely (and most importantly) by the implied volatility of the underlying stock, exchange-traded fund, or index. The implied volatility measures the expectations in deviations in price. High implied volatility indicates expectations for significant vicissitudes in price, and, as a result, options trade with higher premiums. What is truly happening is traders who expect a big change in price buy up the options (most typically near month, at-the-money options); this activity causes option market makers to lift offer prices. Thus, higher implied volatility.
One strategy might be to short options with a high implied volatility. One would do this if she expected the change in price to be less than what is "priced in", and thus implied volatility would drain. One could use such a strategy in a number of ways, be it selling options naked, using short vertical spreads to limit risk, or selling calender spreads.
Another strategy might be to buy options with a low implied volatility. One would do this if she expected the cnage in price to be greater than what is "priced in", and thus implied volatility would ift. One could use such a strategy in a number of way as well, be in buying options outright, buying vertical spreads to take advantage of positive theta (i.e., the option owner receives income from the short option, although they sacrifice potential profit to the upside), or buying calender spreads.
One can also limit deltas buy buying/selling straddles, strangles, butterflies, condors, and iron condors.
There are too many thing one can do with options.
And very few traders realize that their price is made up just as much by implied volatility as it is by intrinsic value.
*a quick note: i/v = IV = I/V = implied vol = implied volatility
*reference material will be provided. And we'll go from there.
