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Implied Volatility: Buy Low and Sell High

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A large of investors are staking their money on options. It has been seen that options as a choice of investment have a large number of benefits that are not present in the case of other financial instruments. However, a large number of people do not wish to endeavor into the arena of options. This is because pricing options is a technically tough job that requires an adequate knowledge of the phenomenon of Implied volatility.

The Concept of Implied Volatility
The aspect of option’s premium price could get affected by a large number of aspects. This is why most people do not go for options. However, a good idea of the interest of options can help you reap great benefits from options as choices of investments. A good idea of implied volatility can help you maximize your returns from options in the market and avoid the pitfalls of losses.

Basic Knowledge of Options Pricing
Options pricing can be explained in two categorical contexts – intrinsic value and time value. The intrinsic value of an option can be explained to be the difference between the inherent value and the trading value. On the other hand, time value will refer to the extra premium that is added to the options. This aspect can get affected by the time of expiration that we left for the options. The time value can get affected by the elements of the strike price, the stock price and the interest rates apart from the time span that is left for the expiration of the stock.

In simple words implied volatility will represent the changes that can occur in the prices of the options during the cycle of the option’s life. There are various factors on the basis of which the prices of an option can either go up or down in the market. Experts opine implied volatility of an option will depend on the demand and supply of the option. As the expectations of the buyers in the market increase for an option, the demand of the option also goes high. A high demand will also ensure high implied volatility which will ensure a greater price of options. On the other hand options with a low implied volatility will mean lower option prices. Time value is one of the good indicators that can help you to discern the implied volatility of an option.

Importance of Implied Volatility
Implied Volatility can be segregated under a chart and is tabulated by many organizations. Investors prior to investing in options must keep a good check on these charts and graphic representations. Implied volatility is one of the best ways through which investors can keep a tag on the growth and fall of options prices. An option with a good implied volatility rate is the best place to invest in. While doing the same an tag on the expiration period of the option must also be taken into consideration. Short-dated options get effected lesser due to implied volatility. However long-dated options can get more affected by the aspects of implied volatility.

There are professional platforms that record the effect of implied volatility on options prices. They can offer you the change in implied volatility in terms of percentage and can provide you records on different options. These platforms can also compare two or more options for your benefits. Referring to these platforms is a good idea for investors. This gives them an idea about the options on which they can invest safely.

Strategies On The Basis of Implied Volatility
Like everything else implied volatility moves in cycles. There are highs and lows which effects the prices of the options. Hence the aspect of implied volatility can help you to design your plans and strategies for buying and selling an option.

When you see that the implied volatility is high for an option you can be sure of the fact that the company is about to experience an expansion of a strengthening of its position in the market. This helps to elevate the price and the position of the option in the market. Again do not delay your decision of selling the option if you see that the implied volatility of an option is low.

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