Confusion regarding Options Implied Volatility

[raj_hpking]

Hi all,

I am confused about Options IV. I would really appreciate if you guys help me to clear the confusion.

What I read is,

• IV is a variable in option pricing formulas that shows how much an underlying asset can fluctuate between now and the option's expiration.
• Also, other definition for IV is, most of the time IV increases the stock prices will go down and vice versa.

But, as I understand, the word of volatility is that when we see the volatility goes up then the stock prices can fluctuate more up OR down as per first point. Also, IV is changing daily then why to use it to predict the potential move in the underlying stock prices?

 

[smeaglegolum]

IV changes as the premium of option price changes. When IV is high means premiums of the options are very high which indicates that people are betting that the stock will move by X% down or up depending on their bias. So, based on these IVs one can guess what people are thinking and roughly estimated the likely movement of the underlying stock by the time of expiry of the option.

 

[srikanthyadav444p]

Hi all,

I am confused about Options IV. I would really appreciate if you guys help me to clear the confusion.

What I read is,

• IV is a variable in option pricing formulas that shows how much an underlying asset can fluctuate between now and the option's expiration.
• Also, other definition for IV is, most of the time IV increases the stock prices will go down and vice versa.

But, as I understand, the word of volatility is that when we see the volatility goes up then the stock prices can fluctuate more up OR down as per first point. Also, IV is changing daily then why to use it to predict the potential move in the underlying stock prices?

 

[srikanthyadav444p]

implied volatility refers to future expected volatility in the underlying asset which is reflect through option price while change in underlying security price represents current volatility.