Are You Paying Too Much for Options? Compare Implied vs. Historical Volatility
When you trade options, you’re not just betting on a stock’s direction; you’re betting on how much it will move. But how do you know if the market’s expectation for future volatility is fair? Without a reliable way to assess it, you could be paying too much for your options.
This is where volatility benchmarks become invaluable. By using the right tools, you can quickly assess whether a stock’s implied volatility (the market’s forecast) is high or low relative to its historical behavior.
The Two Sides of Volatility: IV vs. HV
To make a smart comparison, you need to understand the two main types of volatility:
Implied Volatility (IV): This is a forward-looking estimate of a stock’s future movement. Think of it as a contractor’s estimate for a project—it’s not a guaranteed cost, but it's what the market expects to happen. IV is a derived value that comes directly from option prices.
Historical Volatility (HV): This is a backward-looking observation of how the stock actually behaved in the past. It’s a measure of the stock’s historical price fluctuations over a specific period, like the last 20 days or the past year.
The key to a good options trade often lies in the relationship between these two.
Your Quick Guide on Market Chameleon
You don’t need to be a data scientist to make this comparison. On Market Chameleon, we’ve put these benchmarks right on the option chain to give you an instant assessment. When you visit the options page for a stock like Google, you’ll see a quick reference that includes:
30-Day Implied Volatility (IV30): This is the industry-standard benchmark for implied volatility. It's a standardized number for options that are at-the-money with 30 days until expiration.
20-Day and 252-Day Historical Volatility: These numbers show you how volatile the stock has been over the short term and the long term.
By comparing the IV30 to the historical numbers, you can immediately tell if the market is pricing in more or less volatility than what has been observed in the past. If the IV30 is higher than the historical volatility, it suggests the market expects more price movement in the future.
This powerful tool helps you make a quick assessment without manually digging through individual options. It's the first step in deciding whether a stock's options are worth your attention, especially when a newsworthy event is on the horizon.
Explore the Option Chain for Google (GOOG) and start analyzing IV vs. Historical Volatility for yourself:
https://marketchameleon.com/Overview/GOOG/OptionChain/
