How Can You Tell If an Option Is Overpriced? | #OptionsHandbook EP013
When analyzing stocks, people often look at the P/E ratio to decide whether a stock is expensive or cheap. 📊
In the options market, that “price check” tool is called volatility.
📘 In the Options Handbook, volatility is explained like this:
▶ Measuring How Much Prices Move. 📈
Volatility tracks how wildly a stock tends to move. There are two primary flavours of volatility:
Implied Volatility (IV)–the market’s forecast of future moves.
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If IV is high, traders expect turbulence up, down, or both.
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If IV is low, the market's pricing in relative calm.
But here's the key point: IV isn't about whether the stock will go up or down. It's about how uncertain things feel right now.
Historical Volatility (HV)–how much the asset has moved in the past. Think of it as your rearview mirror.
▶ What IV Tells You? 💡
When IV is high, option premiums rise.
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For buyers: higher cost, lower reward ratio.
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For sellers: more income—but higher risk of being assigned and larger potential losses.
🎁 There’s a lot more on volatility—real examples, charts, and strategies—in the Options Handbook, now available in the Tiger Coin Center!
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