The model says a 10% one-day drop should almost never happen, yet a stock can do it twice in one year. This lesson shows how to turn implied volatility into a likely range, how often big moves really come, and how the market charges for them.
After this lesson you can
- Work out a one-standard-deviation move from implied volatility and the time in years
- Tell the odds of ending beyond a price from the odds of touching it
- Explain why puts far below the stock trade at higher implied volatility
- Size short options for a gap, not for the model's odds
- Use the straddle as the average move, see why the range is lopsided, and avoid the five mistakes
Chapters
- 0:00Less than once in fifty thousand years
- 1:08How far a typical move goes
- 2:19Why the range is lopsided
- 3:31Big moves come more often
- 4:44What the market charges for it
- 5:56Ending there, or touching it
- 7:06If you sell options
- 8:17If you buy options
- 9:19Putting it to work
- 10:28Five mistakes
- 11:15The whole lesson on one screen
Practice with:Volatility Lookup