What is an Option Worth?

Welcome to my options blog.  In the coming months I will be posting a number of videos explaining advanced options topics. Everything is free, so enjoy!

The first video is called “What is an Option Worth? The Many Faces of Volatility – and the VIX.” It explains option pricing in an easy-to-understand, intuitive manner – along with a complete discussion of volatility, especially implied volatility. From there I go into the VIX – what it is and what it truly represents – and then talk a little about the importance of implied volatility to option trading.

A few credits: Excel spreadsheets were constructed using the Hoadley option add-in functions.  The ARNA example at the end of the video is illustrated with screens from Think or Swim’s trading platform. And for pointing out the example to me, thanks to Chuck Eickelberg.

Please feel free to leave comments and questions – along with suggestions for future videos.

82 Responses to “What is an Option Worth?”

  1. Carol says:

    I just stumbled on to this while surfing the web. I found this to be a very informative video. Thank you.

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  3. Dean you are the light at the end of a tunnel.Your presentation was unflappable!!!you were calm,cool and collected.
    There is one problem I had is when you showed the presentation in the comparison of the two charts on ARNA. The problem with that is not everyone uses think or swim platform.
    Is it possible to do a demonstration using the same example,or another,using the cboe website.I think it would be of great service if you could use that website and show another way of interpreting IV

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  5. mitul shah says:

    hi dean, thanks for explaining IV in a simple way. how can i download this video.

  6. Rm says:

    Hi Dean,
    Let me congratulate and thank you for a GREAT presentation. I really understand it much better. Feeling good.

    Thank you.

  7. David says:

    Dean, That was an awesome presentation. Clear, concise, useful. Looking forward to your next video.

  8. Carolin says:

    Thank you very much, Dean!

    Very good presentation, very well explained. I am student in Finance and have to write about Implied Volatility. I did not understand it in the lecture as it was explained only shortly. This saved me time on doing research, and it was very pleasant just to watch the presentation!

  9. […] comparison that options are like insurance is appropriate.  I’m reminded of the masterful video put out by Dean Mouscher over at Master Options during his relatively brief stint in the […]

  10. Inderjit Nanda says:

    Dean let me thank you at first for your articulate post.

    I was searching for common mistakes that can and do happen while trading options and I found your post.

    The video was very helpful for increasing my vision.

  11. Mr. Test says:

    thanks, for this article. I found it through bing and i found it very helpful. i will look for more interesting articles at this blog. :)

  12. Ian McNeil says:

    Dean
    ,I came across your site by complete accident , but am very happy that I did because I found it to be extremely helpful in explaining the whole concept of IV.Beforehand it was a vague notion but now it fits into everything else I have learnt about Options, but now the penny has dropped.Many thanks.
    I am also very happy to learn that you will be doing a video on the greeks and look forward to its publication.I have one question which is , where would you find the historical IV`s for each listed stock, so as to have this comparison.
    Many thanks

  13. maurice smith says:

    Dean,i found your website quite by accident and i must say WHAT A FIND!!!!thank you for that enlightening demo on volatility.A FEW things i am not too clear about though is, AM I TO ASSUME THAT IN TRADING ANY STOCK I HAVE TO COMPARE THAT STOCK TO THE VIX’S IV IN ORDER TO ASSESS FAIR VALUE? WHAT IF I AM TRADING ETF does the same applies
    i eagerly awaits your answers to this deli ma
    yours truly
    maurice smith
    a fan

    • Dean says:

      No, you wouldn’t compare a stock option’s IV to the VIX to determine its fair value. There are a few useful measures.

      One of the best is to compare a stock option’s IV to the historical range of IVs for that stock’s options. When it reaches an extreme (as high or as low as that stock’s options have been historically), it is probably about to reverse.

      For example, let’s say that historically, stock XYZ has been as low as 20% in the at-the-money options, and as high as 150%. If current IV is at or near the historical high IV of 150%, then selling options into that is really for professionals as it is quite risky and extremely difficult emotionally. That’s because these are times of violent crashes when it looks like the world is coming apart.

      It’s much more comfortable to buy options when IV is near historical lows – 20% in our example. This is an indication of great complacency. And since panic follows complacency as night follows day, this can be a great time to be long straddles or strangles!

      Of course, while waiting for the panic to come, you can lose money with time erosion. That’s where scalping gammas comes in handy. Please see the article on Scalping Option Gammas posted on the website.

  14. Vin says:

    An excellent video and well put together .. You did exactly what you said in the video. I hope you will put some more videos what variables to look for while trading options… There is a another variable called Delta…Could you explain if possible how to use this for trading options?

    Regards

    • Dean says:

      Thanks for the comments and for your suggestion. As it happens, I’m working on a series of videos on delta and the other “greeks.” My intention is to demystify them and show in a practical way how to use them. Can’t give a date when they’ll be ready, but I’m working on them actively.

  15. Jim says:

    I am a retired educator and simply from a teaching presentation viewpoint, your video had all the elements of an excellent lesson design–GREAT job–very clear. Of course now I want more info on how to apply it to covered calls then more complex option strategies (baby steps first).

    ie Some info from an experienced trader’s viewpoint as to what level of implied volatility is a good time to buy/sell short/sell options, indicating the conditions have become excessive and it is time to take advantage of the excess. 50% 80% over 100%??? Thanks for your time and your generous time commitment to educating the rookies.

    • Dean says:

      Jim, you can’t use a blanket level like 50% or 80% because different stocks behave differently. Some are highly volatile, others are relatively stable. A better approach is to compare the current implied volatility of options on a particular stock to its historic range.

      There are other ways to approach it too. What you’re really looking for is IVs that are “out of line.” That can mean out of line with where it usually is, as mentioned above. You can look at relationships too, such as the relationship of IVs of stocks within a particular industry. If for some reason the IV of options on one stock in a group is unusually high or low relative to those of other stocks in that group, that could be a play.

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  17. PeterW says:

    Hello Dean,
    I am new in options trading and find your explanations clear and easy to follow. Regarding the comment on the ARNA puts I would have sold them as well, that’s obvious to me. Regarding Hoadly I have his Excel add in unfortunately I find it hard to use and his software complex with NO support, he is TERRIBLE with support, in fact he told me he knows nothing about options trading he is just a programmer, WOW that really stunned me!
    So I am not exactly a fan of his.

  18. Leo says:

    Great video!! Now that we have a better understanding on what makes options prices change (Implied Volatility), where can a new traders go to find information regarding if the options are cheap or expensive?

    Thank you

  19. Max says:

    were the videos taking down, I can’t seem to location any of the videos? Odd.

  20. Mauro says:

    Hi Dean, thanks a lot for this video. My question is: What is the reason does greeks and IV values do not agree between differents borkers? (However, the values of bid / ask spread is the same)

    • Dean says:

      Hi Mauro:

      The biggest reason they may differ among brokers is that different brokers assume a different risk-free interest rate. They may also input different dividend assumptions for the future. The use of different pricing models may also have a small effect.

  21. LAXMI says:

    Hi Dean, thanks a lot for this video. It excellent! It cleared a lot of my queries on implied volatility. I am trying to trade in options in freight futures and was wondering how to judge from the implied volatility published by the brokers whether the option is over priced or under priced. Maybe i should look at the historical implied volatilty v/s the price of the underlying? Can you pls suggset whether am on the right tract.
    Thanks laxmi

    • Dean says:

      Very interesting question Laxmi. From the strict point of view of option pricing theory according to Black-Scholes, you would try to predict future volatility of the futures – by looking at past activity and anything you know about probable increase or decrease of volatility in the future – and compare your projected future actual volatility of the futures to the current implied volatility of the options.

      That’s the theory. From a practical point of view there are additional considerations. Looking at the historical range of IV, is it currently near the low end of the range or the high end? How big is the spread between the bid and the offer? And perhaps most important, how prone are freight futures to big sudden moves?

      This last question is important because it addresses the biggest weakness of option pricing theory – the fact that real-life price distribution in most markets does not correspond to a lognormal distribution. This phenomenon is often referred to as “fat tails.” Nassim Taleb wrote a whole book about it called “The Black Swan.”

      Where are these options traded? If you could point me to price information about these futures and options I’d be happy to take a look at them and give you my opinion.

  22. Mark says:

    WOW – great example at the end with Arena Pharma. Great video. Two thumbs up.

  23. NSh says:

    Thank you for this great video. Given the complexity of Options, this has helped me a little more.

  24. Eric says:

    Hi Dean,

    Great video. Really explained black scholes. I was wondering what is risk free interest rate and how do you determine it. I noticed you started to explain but decided to come back to it at a later date

    • Dean says:

      The correct risk-free interest for you to use is YOUR interest rate. If you’re borrowing money at 5% to buy options, use 5%. If you’re buying option with money you would otherwise put into T-bills at .25%, use .25%.

  25. Brian says:

    Great video.

    Although, i’m still foggy on implied volatility, but i think that has more to to with my lack of overall understanding of the concept, still.

    My question would be, what is a generally “safe” implied volatility to trade, when making a decision on weather or not to buy the contract or not?

    I am one of those guys that is trading blind right now, but i usually notice that if i’m buying on the trend, and the historical and implied are close number, i assume it’s going the direction i expect. Is that a fair assumption?

    also, what would have been the correct action to take on your last example? sell your call, and just sit it out since you would have lost money from the put?

    also, one critique…The real life examples really help. if you can include a few more next time with varied implied Vol %’s and then show what is being assumed, and what you’d personally expect from the trend, and what you’d buy.

    Thanks for the vid!

    Brian

  26. Tommy McShane says:

    Hey Dean,

    A reply all the way from Dublin, Ireland. I’m new to Options trading (5 months) and am struggling with the many related details. From my Googling, I’ve realised that IV is a very important factor to be considered prior to purchasing (or selling!) options. I happened upon your primer video in YouTube and the video on your website has really helped me get a much much better handle on this somewhat complicated area.

    A very sincere thank you and I look forward to working my way through the rest of your videos.

    Regards

    Tommy McShane

  27. Kenny says:

    Good stuff Dean, thanks for that. The video is really informative!! I’ve got a question that I hope you can help me with.
    The main take away for me in watching this video is that based on the B-S pricing model, the price corresponds to an implied volatility. Would it be right then to say; High Implied Vol = High Price = High Demand? I am now trying to reconcile this knowledge with the volatility smile.
    With the ‘smile’, the ATM option has the lowest implied volatility compared to the ITM and OTM options. I take this to mean Low Implied Vol = Low Price = Low Demand for the ATM option?
    What I am struggling to understand is that if the ATM option has a relatively high probability of expiring ATM (based on the normal distribution), should it not be the case where people would want to buy Deep ITM and ATM options more than OTM options? If thats the case, the ITM & ATM options would have Higher Demand = Higher Price = Higher Vols compared to the OTM options. So why would there be a ‘smile’ phenomeon?

    • Dean says:

      Right, high IV = high demand low supply. Low IV = low demand high supply.

      The volatility smile is an extension of this – the strikes with higher implied volatility have higher demand and lower supply. It’s as simple as that. The next question is “why.”

      In equity indices (SPX, etc.) and most individual equities, the “smile” isn’t really a smile at all. It’s more like a crooked smirk, with the lowest strikes having the highest implied volatilities, and every higher strike having progressively lower IV. Every strike’s IV is lower than the strike below and higher than the strike above.

      That comes from the fact that the vast majority of people are long stocks, not short. So people’s primary motivation in buying puts is to protect their holdings – to buy “portfolio insurance” in the form of puts. That’s why the lower strikes trade at ever-higher implied volatilities.

  28. JM Plessz says:

    I’m just to lazy to study these things in depth, but from a few casual glimpses of Bloomberg TV I got that cash VIX is currently rather low, future VIX higher, and low VIX is a major bullish sign for average investor (reducing risk aversion)

    I therefore concluded that manipulating cash VIX should be a fairly cheap, efficent and difficult to detect way of pushing the SP higher

    ??

  29. Jay says:

    Hi Dean,

    Great great video! Although, I’m wondering if it’s in any way significant that the VIX rallied up on the daily chart WITH the S&P 500 today (July 15, 2009)? After all, you did say that the VIX and the SPX are inversely correlated. Thanks for any clarification you can provide.

    Cheers,
    Jay

    • Dean says:

      Good observation Jay. Yesterday’s VIX action was unusual to say the least. I’ve been watching the VIX for a long, long time, and once in a blue moon I see the negative SPX/VIX correlation break down for an hour or two. Yesterday was the first time I’ve ever seen the correlation turn positive for virtually the entire day.

      But that just goes to show that even the most reliable phenomena are not 100%. Still, in my experience the negative SPX/VIX relationship is the most consistent one in all of trading – at least between two instruments that cannot be arbitraged. And even those can get out of whack.

      Note that the VIX futures did not “buy” the action of the VIX cash index. While the cash rose, the July futures closed down .55 and the August futures down 1.00.

      • Dean says:

        Some additional thoughts: Bill Luby at http://vixandmore.blogspot.com/ has some comments and observations on yesterday’s SPX/VIX anomaly which are well worth reading.

        I think all of us who watch the VIX closely are scratching our heads over this one. Since I’ve never seen an all-day positive SPX/VIX correlation like this, it’s hard to know what to make of it.

        It could be a sort of non-confirmation of the stock market’s rise yesterday. But given the market’s powerful internals yesterday, I think it’s more likely quite the opposite.

        Just look at yesterdays’ breadth readings. The NYSE a/d ratio was 8.99:1, exceptionally strong. Up volume as a percentage of total volume was 96.2% – again, very strong.

        So my best guess is that yesterday’s VIX anomaly represents skepticism that the stock market rise is for real, which is quite bullish. If you see the rise since early March as a bear-market rally, then perhaps yesterday’s VIX anomaly is announcing the start of a blowoff phase of that rally.

        • Man says:

          I was the one who made the comment in Bill’s blog about the movement of VIX and SPX yesterday.

          Bespoke today have made a comment on this matter. It seems the abnormal moving of VIX and SPX is not really uncommon. It happened few times in the past.

          http://bespokeinvest.typepad.com/bespoke/2009/07/sp-500-up-big-vix-down.html

          Thanks for your reply about the statistic distribution.

          Man

          • Man says:

            From Bespoke table, it seems it is difficult to predict from the anomaly for the next week or next month market.

            I still think the market is overly optimistic for short term. Also I have noticed the dow futures has been lower than the actual index for quite some time. I reckon it implies that most investors are skeptic about the rally but do not want to miss the chance of the free ride.

            Man

          • Dean says:

            Man, when you look at the relationship between the SPX and the VIX, a lot depends on your time frame. You can have a day where every minute bar has an inverse relationship – yet at the end of the day both are up from the previous close. Or you could (very rarely) have a day in which most minute bars have a positive correlation, and at the end of the day both finish up from the previous close.

            In both cases the close-to-close relationship is the same, yet to me these are completely different phenomena.

            I’m working on a post to illustrate this – I’ll probably put it up Monday.

  30. Man says:

    Thank you, Dean. My wife was so eager to start trading options. After she watched your video, she starts to understand it is not that simple.

    Since last September, people are talking about black swarms. One of the theories was that black swarms occur because the existing model does not cover fat tails in statistics. I understand using guassian distribution is the simplest assumption which unfortunately is not correct. I just wonder if a chi distribution may build a better model?

    • Dean says:

      All public-domain pricing models that I know of assume a lognormal distribution. That distribution does not correspond perfectly with the real world but then, neither does any other distribution.

      Whatever distribution you use, you can’t assume that it will correspond to reality. The public-domain pricing models have the advantage that they are tried and true and are well-understood. They’re kind of like the internal combustion engine – it may not be the perfect design, but it’s been around so long and and is so well understood and its weaknesses are so well-characterized that despite its weaknesses it works great. Switching to a different design would just bring a whole new set of issues that would at first be poorly understood. Remember the Wankel engine?

      For me, the lognormal distribution works just fine, even with its imperfections. And it’s what I’m used to. So for me at least, spending time searching for a better distribution is probably time that is not well-spent.

      That said, the Hoadley package includes a function in which you can adjust the skewness and kurtosis of the distribution. I certainly would never discourage someone from playing with it and trying to build a “better mousetrap.”

  31. Rocco says:

    Dean, Thank You!

    Great video! One of the best explanations I’ve heard on IV and option prices on the web.

    Thanks

    Rocco
    http://www.a3holdings.com

  32. Vddr says:

    Thanks Dean, informative stuff! A question if I may, if put-call parity holds, and thus the IV’s of puts and calls are equal, then would speculative buying of calls also increase IV, thus resulting in an increase in VIX and give the false signal of market fear?

    • Dean says:

      Arbitrage guarantees that put-call parity does indeed hold, and that puts and calls AT THE SAME STRIKE trade at the same implied volatility.

      However, options at different strikes as a rule do NOT trade at exactly the same implied volatility. This phenomenon is known as “the skew.” It is also sometimes called the “smile” of volatility.

      At every strike, there are puts and there are calls. But for practical purposes, let’s understand that it is the OUT OF THE MONEY options that are liquid. So when the S&P 500 is at 900 and option traders talk about “the calls,” they are really talking about options with strike prices higher than 900 – the 950 strike, the 1000 strike, etc. When they talk about “the puts,” they mean options with strike prices lower than 900.

      Let’s also keep in mind that market participants can be divided into two broad categories, hedgers and speculators. The hedgers are the strong hands, the speculators are the weak hands.

      The stock market is somewhat unique in that it is very one-sided – there are vastly more people long stock than short stock. So when the market heads down, stock owners (hedgers) want puts. That means out-of-the-money puts. Let’s say for example SPX 800 puts (the S&P 500 is currently around 900).

      When the market drops, you can feel the panic. Share owners who are long puts are not selling them. Most probably want more. Those that don’t have puts want some too. That demand – along with the lack of supply – drives the IV of those puts up. At the same time of course it drives the IV of the 800 calls up equally. But with the S&P 500 at around 900, the volume of 800 calls traded is much smaller than the volume of 800 puts.

      When the stock market goes up, the character of the option market is completely different. Calm and relaxed. There are lots of calls for sale. Why? Those who are long calls are speculators, not hedgers, and so they are weak hands – anxious to take a profit and happy to sell.

      So no, in my experience speculative buying of calls does not drive the VIX up.

  33. diegolillo says:

    Hi Dean, i came to chicago from spain to learn about options, attended varios courses and hire some mentoring sessions, and i can assure that your presentation and way of explaining this important matter is awesome, i am quite content that i come across your blog. Looking forward to learning from you. Thanks for your generosity.

  34. diode says:

    Dean, this is a superb video and the clearest I’ve ever seen.

    Does implied volatility also apply to futures in the same way?

    • Dean says:

      Yes, absolutely. All of the general concepts in the video apply to options on futures and options on stocks.

      However, one difference to keep in mind is the behavior of implied volatility when the underlying goes up or down. As I showed in the video, there is a very reliable inverse relationship between the S&P 500 and implied volatility. When the S&P 500 goes up, IV goes down, and vice versa. This is also true of most individual stocks.

      However, this is not necessarily true in commodities. Generally you will see higher implied volatility in soybeans for example in a bull market. Same with crude. In 2008 when those commodities were at their highs, you also saw implied volatility on their options at historic highs.

      This is a fascinating subject and probably will be the subject of more than one video in the future. For now, suffice it to say that to understand this phenomenon it’s important to keep in mind who the players are, what they hope for, and what they fear.

      In stocks, the vast majority of players are long. They hope stocks go up, and fear stocks going down. Hence the reliable inverse relationship between implied volatility and the S&P 500.

      In crude oil, the market is more two-sided. Producers are long crude oil, want the price to go up, and fear the price going down. The rest of us are, in a sense, short crude oil (since we’re all going to have to buy it in the future), and fear the price going up. Hence the historically high crude oil option implied volatilities in 2008 when crude was at its highs.

  35. Thank you Dean.

    That was an outstanding video. It really helped me better understand volatility. I have add your RSS feed to my homepage, and look forward to your future posts.

  36. gk says:

    The clearest explanation of volatility and its impacts on options pricing I ever read/heard . Thank you very much for putting this video.

  37. Ninepin says:

    Great work, your examples and demonstrations tie down the IV in very real terms, very much appreciated.

    So, implied vol is calculated based on the current options price. Then (and I probably should look this up but I’ll guess that) historical vol is calculated based on the opts price at expiration. Can we discern anything from how they move against each other, or .. use historical vol as a gauge to predict maybe the expected variation in IV? TIA.

    • Dean says:

      There are lots of ways to calculate actual volatility (also known as “historical volatility” because you can’t calculate it until it’s happened!). Hoadley has functions to do it through different methods – you can use closing prices, high-low-close, high-low-close-open, etc. You can choose the period, and how many periods.

      For a complete understanding of this, read the article “Scalping Option Gammas.” If you buy options at, say, 25% implied volatility and scalp your gammas until expiration – and at expiration it turns out that actual volatility was 25% – you will have lost the same amount in time decay that you made scalping gammas. I’ll make a note to myself to make a video on this – very important concept in option pricing.

  38. John says:

    What is the advantage to using the Hoadley add-in functions in addition to a trading platform like ThinkorSwim (which you mention above)? The fact you have used both suggests that they are complimentary … ?

    Thanks

    • Dean says:

      I like the flexibility of Excel. I can crunch numbers and display them exactly as I want. For example – the Excel pages in the video. That’s an ultra-simple example but with add-in options functions such as Hoadley, I can build an Excel sheet to do anything I want.

  39. Datul says:

    Thanks Dean. Super. I have bookmarked your website and looking forward to more stuff.
    Please keep it up.

  40. Reinhard says:

    Hello Dean,
    My questions are: what is the IV (%) a percentage of ? Is it a price fluctuation per time for the security ?
    If I may bother you with a specific case: I own shares of a (small cap) company, they dropped 45% the last weeks. Today they went up 30% and I wanted to buy puts to safeguard against further downslide. However, IV was 160% and the PUT price high. What are my options?
    Sincere thanks for your presentation, looking forward to your next topics.
    Reinhard

    • Dean says:

      IV is an annualized percentage – a 1-standard-deviation move over one year. So if xyz is at 100, a volatility of 25% means approximately 68% probability that a year from today xyz will be between 75 and 125. Actually that assumes a normal distribution – the actual lognormal distribution will alter that a bit.

      It’s hard for me to give advice as I don’t know the particulars of your situation or of the stock. One possibility is to look at back-month options, which are probably trading at a lower IV than front-month options.

      But as a general rule, if you are uncomfortable and uncertain what to do, you may wish to consider just getting out of your stock. When people are uncertain and uncomfortable with their positions they tend to make bad decisions, and often end up selling right at the bottom.

  41. Avi G. says:

    Thank you for an interesting and intuitive presentation !! as a newcomer to options i now understand better the IV concept. Good luck with your new blog. Waiting for the next post.
    – Avi G.

  42. Tom George says:

    Excellent, thanks. What is the screen you used at towards the end for the ARNA example, that showed the volatility of each option. Is that available through a service/brokerage? Thanks, Tom

    • Dean says:

      The screen is from the TOS (Think or Swim) electronic trading platform. It is by all accounts a wonderful platform with lots of great features, including Thinkback, which gives you closing option prices for any day over the past several years. That’s what I used in that example.

  43. I D says:

    Dean, great stuff!

    Would you be so kind to share this little spreadsheet you used to calculate cost of an option depending on IV?

    TIA, ID

    • Dean says:

      The spreadsheets I used in that video were all constructed using Hoadley option add-in functions. http://hoadley.net/options/options.htm This is an incredibly complete package of Excel add-in functions, including a system to download prices directly into spreadsheets from various data providers. There is also a graphic options position analyzer. All in all an incredible buy for about $100. Once you have it, building spreadsheets like the ones in the video is child’s play.

  44. Tyler says:

    Dean,

    Great video- One of the clearest explanations I’ve heard on bell curves and the influence of probabilities on option prices.

    Tyler

    http://www.tylerstrading.com

  45. I D says:

    Dean, great stuff!

    Would you be so kind to publish the expression which is used to calculate cost of options depending on implied volatility?

  46. Bill Luby says:

    Nicely done, Dean. This is definitely one of the better videos I’ve seen on IV.

    Welcome to the blogosphere.

    Cheers,

    -Bill

    • Dean says:

      Thank you Bill, you are very kind. And thank you for the wonderful write-up on your fine VIX blog. You really helped give this blog a flying start.

  47. Sam says:

    Nice presentation and excellent explanations but where’s the beef?

    HOW do I use this specifically in trading examples?

    Thanks

    • Dean says:

      The last example in the video – ARNA puts at 443% implied volatility – is a good example of ridiculously overvalued options that can be sold with a very high probability of success. If you had sold them you would have made money – even though ARNA itself dropped 28%. This is a good example of how this info can be used.

      Of course, you have to be careful selling options, even if implied volatility is high. I wouldn’t have sold calls on this stock – even at 443% – because it could conceivably have skyrocketed on the announcement from 4.50 to 30. That’s happened with pharmaceutical stocks.

      But in this case I’m selling the 2.50 puts at .60, so there’s a definite cap on my possible losses. If the stock drops from 4.50 to 1.90 – a huge drop to well below historical lows, I break even. Even if the stock drops to zero – unlikely to say the least – my maximum loss is 1.90 (2.50 minus the .60 I sold the puts for). So overall, selling those puts was an exceptionally high-probability play.

      But perhaps I should make a follow-up video devoted to concrete examples, and maybe that will come soon. Thanks for the feedback.

  48. Masteratwork says:

    A very good stuff.