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, whether used to insure a portfolio, generate income or leverage stock price movements, provide advantages over other
. There are several variables that influence an option’s price, or
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