I understand he said "No." However, no reason to bash on me because I am 4 weeks new to options and I am eagerly trying to learn.
Do you use VIX indicator? Or is it an implied volatility calculator? What is your particular method for determining expiration date, and strike?
Each product has its own implied volatility. If you are a stock option trader than each individual stock will have its own implied volatility. To make things a little trickier. Each strike price is going to have its own implied volatility.
The vix is a broad indicator of the S&P 500 index. If you are trading individual stocks, the stocks you trade may have higher implied volatility or lower implied volatility.
Generally speaking, equities have a negative volatility skew. What that means is that implied volatility is going to be higher for out of the money puts compared to the at the money strikes and the out of the money calls.
This is not a rule though. Volatility is dynamic and constantly changing through the process of supply and demand. You always want to look at fresh data.
All things being equal, the higher the implied volatility is the more expensive the option is going to be. The lower implied volatility is the less expensive the option is going to be.
A very common practice amongst traders is to measure historical volatility and compare it to implied volatility. Historical volatility measures past price data and gives us an expected return and a standard deviation of much prices disperse from our expected return.
For example:
two stocks: ABC $100 a share & XYZ $100 share
ABC (returns): +1, +5, -6, +2 = avg return is $0.50
XYZ(returns): +1,-1, +2, +0 = avg return is $0.50
same average returns but as you can see ABC is riskier because the fluctuations are greater. So ABC would have a higher historical volatility.
the market uses historical volatility as an estimate but supply and demand is what gives us the implied volatility.
if there is great demand for put buying: the market maker will want to sell you those puts for a higher price than what they are worth. by selling those options for a higher price the volatility increases on the put. (investors buy puts to protect their portfolio)
if there is great demand to sell calls: the market maker will want to buy those calls for less than what they are worth. by selling those options for a lower price the volatility drops in the calls. (investors sell calls against there long stock to generate income)
hence in equities you see a negative volatility skew. higher IV% in puts than in the calls. With that said though during the dot.com era there were some individual stocks that showed a positive skew. higher implied volatility on the call side. The individual stocks were to expensive to buy for some so the demand to buy calls became greater.
The market maker wants to buy for cheap and sell higher. Just like most businesses.
Whenever you buy an outright call or put you are long volatility. Generally but not always in equities you will see IV drop as the market increases and see IV increase when the market drops...today is a good example of that.
IV is a function of supply and demand and not only based on direction. A spike in IV will be caused by the unknown as well. For example before an earnings announcement you will see IV jump because there is uncertainty. The market maker wants to give themselves more margin for error.
Each Option Contract has its own expiration date associated with it. Options are wasting assets. SO this is predetermined and it does not change. If you are trading individual stocks than you have to see what the implied volatility is for the strike prices you are interested in.
Strike selection is a matter of your market opinion and the overall strategy you select. each strike has different properties. At the money strikes, In the money strikes and out of the money strikes. So there is no right answer for this.
Congrats on entering the world of options. Remember its a marathon and not a sprint.
