This timely segment features an examination and discussion of how implied volatility impacts the prices of options and how option prices impacts implied volatility. The recent market volatility can teach traders many important lessons and this is one of them.
The fluctuations in volatility provide opportunities for options traders. High volatility is an opportunity for premium sellers. It’s vital though to understand why volatility and options prices move.
A graph was displayed of the price of the VIX from September 2014 to present. It showed several volatility spikes with the latest being the greatest by far.
Implied volatility (IV) is mean reverting.It was explained how option prices IV are tied to each other. It was further explained what part of option prices is mean reverting and what is not.
How volatility moves from low to high and back again was explained. An example from the recent market upheaval was used. A table was displayed of the September SPX 1575 (95% OTM) put on August 21st, 24th, 25th and 26th. Each day was broken down with both the up and down moves in the SPX and the VIX and the price of the September SPX 1575 put on each day.
Finally, the mechanical nature of the mean reversion of IV was noted. How natural market forces drives the movement was stressed.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista to learn the takeaways and for a better understanding about how low and high volatility and perceived risk moves option prices.