Hello, I was wondering if someone can explain to me what x% implied volatility means. For example, this article uses it to talk about BAC: http://finance.yahoo.com/banking-budgeting/article/113376/options-trader-bet-big-bofa-barrons. I've always understood implied volatility to be the extrinsic value of an option, which should be the market price of an option when it is out of the money. But how do they calculate the implied volatility % and what does it as a % mean? Thanks.
Simplified, an implied volatility of about 16 in an option,is pricing in daily moves of around 1% in the stock .So an option trading with an implied volatility of 32, is pricing in daily moves of around 2%. It is the value of uncertainty in the pricing of options.
http://en.wikipedia.org/wiki/Implied_volatility short answer: it's the expected level of volatility of the underlying being priced into a particular option as an annual %, based on current market prices/conditions
From what I read up VIX yesterday, people might explain away implied volatility with the definition but to me, IV seems to be some kind of emotional "premium" for my lack of better word due to increase agressiveness in the option purchasing. When the market drops, investor scrambles to buy protection thus this push up the implied volatility part of the option pricing formula... I assume all the rest of the formula are not as wishy washy so IV gets the push when options become expensive. Correct me if I am talking out of my ass. I am still trying to figure out how the real time VIX chart help day trading ES since it has been sitting on my screen for a few years... I honestly did not watch it very much. It bothers me quite a bit that I did not figure out how this is being used. If anyone out there actually "watch" VIX real time chart to trade ES for profits, please help me out with this piece of the puzzle. It occurs to me sometimes useful information are just right in front of us and can't see or interpret it. (I am not interested in throwing a bunch of indicators on VIX and imagining seeing rainbows.) Thanks.
You are leaving out a huge piece of the extrinsic equation-- time to expiration. Study and learn as much as you can on option greeks and how changes in IV (vega) and time (theta) can affect option prices (in addition to delta and gamma of course... rho...eh...not so much in this environment.
Implied volatility is how "much" the market expects the underlying to move over some time frame, expressed in annualized terms. The assumption here is that the underlying's value X days from now is normally distributed, with the implied volatility being the standard deviation of that distribution. Basically, it's how spread, or how wild, the market expects the underlying to be. The number is given in annualized terms, with the assumption that variance grows linearly with time (and thus std dev grows with square root of time). So, if an option expires in 3 months with a quoted IV of 50%, then the market thinks the distribution at expiration will be normally distributed at 25% of current price.
is there any website (free of charge ) out there that can screen stocks everyday, let say giving stock with high IV/SV ratio and high percentile, or something like that, related to volatility, and also can show the IV/ SV graphs for the last 10 years ?