Ok I just answered my own question. Quoted from Investopedia "In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets." So then if you want to buy a call you would want to buy it when it is going up but you would want to buy an OTM call because it would not affect the intrinsic value. Am I correct?
BTW, to see the effect of price on ROI, try a simple comparison of two options at expiration. AAPL closed at $166.80 yesterday. Compare investing (?) $500 in one Oct 165c or 3 Oct 175c's. Then run an expiration return form 165 to 185. In terms of ROI, below 180 the 165c does better. Above 180, the 175c position does better. Your Investopedia definition is correct but there's more to it than that. Implied Volatility represents the volatility of the underlying stock in the future. It reflects market supply and demand for the option. Apart from daily news, pending events will affect supply and demand. AAPL will release earnings on 10/22. IV tends to increase for up to a month before EA's. For a pretty picture (g), see: http://www.ivolatility.com/options.j?ticker=AAPL:NASDAQ&R=1&period=12&chart=2&vct=
Thanks spindr0. Do you think the calls will ever go down on Aapl? The stock goes down and the calls go up, it doesn't seem like these things are ever going to come down and I am missing the boat. How do you think they will act around options expiration date?
Karnak says: Relative price of AAPL options will decline on 10/23 Karnak says: Click on the link in my last reply to see why
I clicked on your link and don't see what you are talking about. The only thing I see is that the HV, according to last year, dipped lower thatn what it is right now. But if the stock were to go up, wouldn't the intrinsic value offset? And wouldn't there be greater volatility anyway? Who is this Karnak you speak of. Thanks again for your help though. Nov 240's and 250's have dropped a bit though today as of midday right now. I think now may be the time to pick some up.
Well, without even checking the options quotes, I'm guessing those Nov 240 calls probably just took a dip...
The blue line is the HV. Look at the brown line which is the IV Index Mean. Note the big drop in IV every 3 months (and the 4-6 week rise before that). What do publicly traded companies do every 3 months, assuming that they're not soon to be wallpaper? Buying calls is a directional play. You don't buy them because their IV (and price) dropped a little on any given day. You buy them because you think that the underlying is going to rise enough in a given period of time to make a profit and/or to a lesser degree, IV might increase as well. But you must be mindful that as IV rises, the call's price will increase and the more you pay for the option, the more price and/or IV must move in order to break even/profit. I don't understand this question because there's no intrinsic in OTM Nov 240 and 250 calls. Please be more specific or indicate what I missed. LOL. Johnny Carson used to do a skit where he played Karnak The Magnificent who predicted the future
spindr0, I guess I am using my stock buying strategy where I would use the chart to buy on the dips. But I realize there is much more involved with options and am trying to learn as much as possible. I just watched the options keep going up and up and thought they had to pull back like a stock. Which, thankfully after today I'm hoping they should go down a bit. [But if the stock were to go up, wouldn't the intrinsic value offset? And wouldn't there be greater volatility anyway?] What I meant by that was although you are right there is no intrinsic value for OTM, since the price was going up there would be a greater chance of the option actually hitting the strike price. I also noticed that it seems that the best time to buy options is in midday when things are quiet and the best time is to sell either in the first 30 minutes or last 30 minutes when the market is volatile. Do you agree with this? And also, would the November options act a certain way right before or after October expiration? Meaning will IV go up or down causing price fluctuations? I greatly appreciate your help.
What is TOS? I am constantly on the CBOE website and am trying to learn as much as possible. I wish I would have known more about options years ago. Any links, suggestions, books etc. is appreciated. I definately am not a beginner with options but think I have much more room to grow. I would also like to learn HOW to use the Greeks to my advantage. I know what they are but don't know how to use them.