What does Implied Volatility & IV skew curve represent? Implied volatility is one of the more challenging topics for new traders to grasp, but understanding it will give you an edge in the market place when it comes to your options trading. In this video we talk about what IV really is and why it’s important.
Click here or in the video to better understand implied volatility!
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►00:00 Introduction ►00:35 Explanation around IV ►02:13 Black-Scholes Model ►05:20 Model Variables & Guesses ►09:10 Options Butterfly Example ►15:15 Look at what IV is doing ►19:45 Outro
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What is Implied Volatility?
There is Implied Volatility (IV) for the general market or the SPX in general. VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange’s CBOE Volatility index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.
The VIX doesn’t necessarily represent the IV in specific options that are involved in your trading positions. Nor does it necessarily have anything to do with what your multi legged trading positions are going to do from a P/L standpoint.
Each option has it’s own Implied Volatility. Each option strike has it’s own Implied Volatility. That Implied Volatility number represents the amount the option is overpriced in relation to the Black Scholes Model base value when considering interest rates. The P/L of your position is going to be based on how the relationship between the IV of the specific options of your position change not the VIX level itself.
And that is just the beginning. Please watch the video to get more clarity on the importance of Implied Volatility.
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