Option Q & A

Option Types

What is the difference between calls and puts?

Call options give the holder the ability to buy shares of the underlying stock at the price indicated by the strike. If a trader holds an option for a stock that is priced at $55 and the strike price is $50, those options are effectively worth $5, because the trader could exercise the options, buy the stock at $50, and sell it on the open market for $55.

Put options give the holder the ability to sell shares of the stock at the strike price, essentially the opposite of a call. If an underlying stock price is below the strike price, puts would have intrinsic value, unlike calls, which need the stock price to be above the strike.

Volatility

How does volatility affect the price of an option?

The higher the volatility, the higher the price of the option, for both calls and puts. If the volatility increases, but the price of the option decreases, it is likely because of a change in underlying stock price or time to expiration. The closer you get to expiration, the less volatility impacts the price of the option.

How does MarketChameleon calculate volatility?

We have a few different ways of calculating volatility, depending on what type of volatility we're referring to.

For historical volatility, we typically use a version of Open-High-Low-Close annualized vol, the Yang-Zhang calculation method. Most places throughout the site, if you see historical volatility, it's that version. On some pages, we compare it with a Close-to-Close calculation, but this is explicitly marked.

For implied volatility, we use a binomial implied vol estimator, with discrete dividend dates if they are available.