The single most important – and also the most difficult – question that riddles every investor’s and trader’s mind the moment they’re about to put any money down, whetherthey’re placing their first trade or have placed thousands in their life, is…
Is it cheap enough?
It’s so fundamental because a dollar or two more on the expensive side can mean cutting down your profit potential by 50% or more.
And on the opposite end, a dollar or two on the cheap side means increasing that potential by just as much.
Now, most traders watch the greeks religiously. These are a ton of complicated numbers that show how an option is priced; based on volatility, time decay, the underlying security’s price, and more. But these can get really complicated (the guys that developed the model for options pricing won the Nobel Prize).
That’s why I want to break it down for you with two key simpler indicators instead: implied volatility (IV) and historical volatility (HV).
Using these two simple patterns, you can see whether an option is cheap or expensive… you can estimate profit potential… you can estimate holding period… and more.
Let’s run through it…
December 28 2022