Implied Volatility: Buy Low and Sell High

Options

, whether used to insure a portfolio, generate income or leverage stock price movements, provide advantages over other

financial instruments

. There are several variables that influence an option’s price, or

premium

.

Implied volatility

is an essential ingredient to the option-pricing equation, and the success of an options trade can be significantly enhanced by being on the right side of implied volatility changes.

To better understand implied volatility and how it drives the price of options, let’s first go over the basics of options pricing. (See also:

Understanding Option Pricing

.)

Option Pricing Basics

How Implied Volatility Affects Options

How to Use Implied Volatility to Your Advantage

Figure 1: Implied volatility of an option

Figure 2 : An implied volatility range using relative values

Using Implied Volatility to Determine Strategy

The Bottom Line

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