Trading_notes

  Implied Volatility is an estimation of stock price movem ent over a period of time, derived from the Black-Scholes Model. Implied Volatility is an unobservable variable, so we must solve for it using the other Black-Scholes inputs. 2. At its core, Implied Volatility is presented on an annual, one standard deviation basis. The default timeframe for IV is one year, and since we are forecasting future movement, we can never know the exact move until it happens. Therefore, we must present the value with room for error, which is why it is presented on a one standard deviation basis. 3. Options prices and Implied Volatility have a... Since the extrinsic value in option prices drive IV, if OTM option prices are high, IV must be high, relatively speaking. If OTM option prices are low, IV must be low, relatively speaking. Therefore, option prices and IV have a positive correlation. 4. In a low IV stock, it is _____________ to buy an ATM/OTM option because the market is forecasting less potent