Implied Volatility & Expected Range Using Confidence Levels - Options Trading Concepts | Summary and Q&A

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June 19, 2020
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The Organic Chemistry Tutor
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Implied Volatility & Expected Range Using Confidence Levels - Options Trading Concepts

TL;DR

Learn how to calculate the expected range of a stock using implied volatility and confidence level, with examples and formulas.

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Questions & Answers

Q: What is implied volatility and how does it affect option prices?

Implied volatility measures the magnitude of a stock's future price changes based on option prices. When implied volatility increases, option prices increase, and when it decreases, option prices decrease.

Q: How can you calculate the expected range of a stock using implied volatility?

The formula for calculating the expected range of a stock within one standard deviation is: stock price x implied volatility x square root of days to expiration / 365. This provides an estimate of the price movement with a 68% confidence level.

Q: What does a 68% confidence level mean for the expected range of a stock?

With a 68% confidence level, there is a 68% chance that the stock price will be within the calculated range, and a 32% chance that it will be outside of that range.

Q: How can you adjust the confidence level for the expected range calculation?

To adjust the confidence level, you need to determine the range within different numbers of standard deviations from the mean. For example, for a 95% confidence level, calculate the range within two standard deviations.

Summary & Key Takeaways

  • Implied volatility helps determine the magnitude of a stock's future price changes based on option prices.

  • When implied volatility is high, option prices are high, and when it's low, option prices are low.

  • The expected range of a stock can be calculated using the stock price, implied volatility, and the square root of the days to expiration.

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