Investing for Organizational Sustainability

chapter nine • introduction to options
frequently in the 20- 30 range and even hit a high of 90 in October 2008
when investors feared the world was ending and the financial system was
said to be at the brink of collapse.
The important thing to remember about the VIX is, when it is high, options
become expensive to buy as the implied volatility in the options price rises.
9.7 Implied Volatility
Implied volatility compares the current market price of a
stock with its theoretical future value, to predict the true
value of an option. This may sound like a risky probability equation –
and it is – yet it’s based on sound factual history and intelligent projections
for the near future.
Once again, volatility is a basically neutral measurement, not an indication
of a good or bad condition or decision. As a measurement or predictor of
movement, you must remember that it may move either up or down. As
an investor, you must consider the volatility of different securities when
making decisions, particularly with options, either calls or puts.
Implied volatility affects buyers and sellers, therefore affecting the price
you pay or receive for your options. High implied volatility may cost you
more on the buy or sell side, as the other party will incur more uncertainty
and risk, whether projected or real. As long as you are aware of this factor,
you can price your decisions accordingly, but count on the buyer/seller of
the asset to do the same.
Until recently, the pricing of options was a largely haphazard affair of traders
who came up with prices on their own, until the Black-Scholes model
was developed.
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