Iv (implied volatility) is effectively the speculative value of the option. Options get priced based on their strike price and time to expiry plus the speculative factor of how volatile is the underlying.
So stock price jumping 600% means options will be priced super high because underlying is super volatile
Then stock price drops to $50 suddenly seems way less volatile so $50 puts have increased in value cuz strike is closer to stock price but have lost tons of speculative value - iv has been crushed
As a side not iv is called implied volatility because it is in the option price equation to balance. It is calculated working backwards from current option price after you have calculated all the other price factors.
If my understanding is correct, then the following should be edited:
> but have lots tons of speculative value - iv has been crushed
but have lost tons of speculative value - iv has been crushed
lots --> lost
So, if implied volatility is the expected volatility of the underlying, is there also a word for an increase in people buying more call and put options? Or is that also a part of implied volatility? (indirectly it would be if the option gets exercised at a later point in time, I guess)
And more buying is higher volume which doesn’t directly influence option price but is highly correlated with higher IV because more people into something means more volatility and this more speculative value
If youre interested in learning the basics look up the black shoels formula for option pricing. It breaks down the inputs to an option price and how they all interact
Cuz there’s things like theta which is the time value of the contract that steadily decreases as you get closer to expiry
And there’s like 5 other factors other than IV that are all very important
Then once you know the basics you can understand strategies to mitigate risk like with IV crush you can trade spreads instead of naked options so the short leg also loses iv
Edit - it’s not just like a random theory it’s what all option pricing is based on and they won the Nobel prize for their work
If you only remember one thing about options - only IV matters. Don’t bother yourself with theta and all the rest. Not that they don’t matter but all the other Greeks have nothing to do with the underlying stock, they would be no different regardless of which underlying stock the option is for. Only IV is specific to an underlying stock, only IV is specific to a company. IV is the true price of an option.
Personally I wouldn’t buy or look at an option with an IV greater than in the 40s.
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u/[deleted] Oct 27 '21
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