The more volatile a stock, the higher will be the price of its options, other things remaining the same (ceteris paribus). Implied volatility (IV), however, is another matter. IV can be higher or lower (given SV levels), and is essentially volatility that is expected due to market conditions and thus already priced into an option.
The concept of IV, furthermore, is key to under-standing the pricing of options in terms of whether an option is “overvalued” or “undervalued”. Let’s first look at an example of an “overvalued” option to illustrate.
-John Summa, PhD
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